Principal Vs. Partner: What Are The Differences?

If you have always heard of a principal regarding agency theory and partner regarding the partnerships in businesses, etc., you never had complete knowledge. Principal and partner are the terms that are used in several places for different meanings.

If we talk about the education industry, a school or college principal is the managing director.

If we talk about financial consultation or law firms, the meaning of principal will change.

And if we talk about principal as a noun, it has completely different interpretations.

Similarly, the word partner might have different interpretations. But in most cases, the essence of the word partner exists. Principal and partner are terms that are often questioned when it comes to equity and management roles of companies.

Therefore, it’s important to highlight the differences and similarities between the two. It will not only clarify the concept but also helps understand the roles and duties of each position in any company.

Therefore, we have covered the differences between principal and partner to help readers get a clear perspective. So let’s get into it.

Definitions Of Principal

We will quote definitions of a principal as defined in different theories and perspectives.

In the Agency Theory, the principal is defined as,

A principal is an individual or individuals heavily dependent on their agent in executing the specific decisions, transactions, actions, etc., that can lead to uncertain or fluctuating outcomes.

According to the Principal Theory,

Owners and shareholders of a company are ethically authoritarian and opportunistic and take advantage of employees who work for them. In this model of governance, shareholders or owners of any organization are called the principal.

In general, we can define principal as,

An individual having a controlling authority or a leading position in any organization is called a principal.

Definitions of Partner

When it comes to a partner, all partner definitions will be more or less the same with minute changes in interpretation.

When we discuss it in partnerships,

A partner is defined as the member in a partnership leading to the formation of an entity. All partners share the profit and losses to the extent of their liability.

If we talk about a business partner,

A business partner is defined as a commercial actor having some kind of alliance with another commercial actor. A partner is not necessarily a living person, but it can also be an artificial person.

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For instance, a limited company can be a business partner.

In general terms, a partner can be a group of people having combined interests or mutual agreement. For instance, spouses, a music band, etc.

Principal And Partner In Consulting

Principal and partner in consultation have different meanings and interpretations. Both parties usually have a share in equity. However, they may vary in terms of their authority and responsibility in the active management of the consulting firm.

 A principal in a consulting firm is usually the highest manager or top position who has the authority to direct employees, make strategic decisions with his insight, and manage the consulting firm. A principal is someone having industry-specific experience that he utilizes in successfully running the business.

A principal can also be defined as, 

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A principal is a manager in practice, and it’s a gateway for partner promotion. Therefore, a principal might be doing partner-level work as well. A principal has a stable salary with a variable bonus.

On the other hand, 

A partner is also at the higher management level of the consulting firm. Partners are usually responsible for selling cases and have several assignments to oversee different projects.

The involvement of the partners might vary from active participation to less frequent participation in the day-to-day activities of a firm. The variable element in salary is quite high when it comes to partners.

What Are The Differences?

We have discussed the definitions of principal and partner to understand each position in different scenarios, from a company to financial consultation to law consultation. Based on the business definitions, the differences between principal and partner can be worth understanding.

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Barrier Position

While many call a principal in any company a gateway position to become a partner, it’s because this higher level of management is given a share in equity for their performance leading them to become partners of the company. However, the role of the principal can sometimes be a barrier for the position holder to become a partner of the company. Although they are getting a salary, the principals often do partner-level work without any stake in the business.

On the other hand, partners might not get a salary and stable financial return, but their authority and decision powers are more legitimate than that of the principal. A partner does not need to take an active part in management.

Equity

When it comes to equity in the business, different experts hold varying views. In some industries, principals are the company’s partners with the highest stake in the company’s business. However, in general, the principal is similar to a manager. He doesn’t hold a higher stake in the equity of the company.

On the other hand,

Partners have the greatest stake in the equity of any business compared to any other stakeholder.

Span of Control

Control is often associated with ownership rights; principally, partners should have more authority and control over the company’s decision-making.

Principals can have variable control depending on their position in the company. For instance, if a company’s principal is holding the CEO’s chair, the amount of control he exercises will be more inward-facing than the partners. The internal customers(employees) of the company work on instructions of the CEO and not individual partners coming in & giving instructions.

When it comes to partners’ authority, their control depends on the stakes in the company. However, collectively, the partners of a company make any executive decisions of the company, and their span of control is generally outward facing with other stakeholders of any business.

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Industry-Specific Expertise

When it comes to industry-specific experience, the principal is the one who is working inside the company’s business environment, dealing with the internal stakeholders, and must know the industry to lead the business.

But partner can be any XYZ knowing any industry. There is no requirement for a company’s partner to have industry-specific experience. The partners can often assume an executive position in the company without industry-specific knowledge on hand.

Educational Background

The educational background of a principal might be a point of concern when we talk about a company principal. But it’s almost irrelevant in the case of a partner. Generally, the principal must hold at least a bachelor’s degree.

However, the only eligibility to become a partner of the company is the eligibility to make a contract and funds to finance the ownership. However, when an internal employee reaches partner status based on promotions and performance, having higher degrees is often what helps them reach there.

The education background of the principal and partner might be differently discussed when it comes to the consulting firm.

Management Level

The principals of a company work at the higher management level and interact with the company’s internal stakeholders.

As earlier mentioned, a company principal is often similar to a high-level manager. Any company’s principals are working toward the implementation of new standards and expectations of the company’s culture. They work closely with the company’s executives to develop new ideas to improve the business growth and wealth.

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On the other hand,

Partners usually do not have any involvement in the management at the individual level. However, partners have the highest authority when it comes to ultimate decision-making. But the authority is practiced at a collective level.

Responsibility

The responsibilities of a principal include:

  • Management of relationships with the clients
  • Networking with potential clients at different avenues
  • Designing and implementing the company’s long-term goals and strategies
  • Fostering the company’s culture
  • The day-to-day and executive decision-making regarding the business and future direction of the company

On the other hand,

The responsibilities and duties of a partner are:

  • To attend meetings of owners/partners like annual general meetings, special meetings, etc.
  • Bring new clients and business to the company using their own contacts and links
  • Voting power to choose the company’s directors and make important decisions
  • Jointly liable for actions of other partners or owners

Conclusion

We have discussed definitions of partners and principals in different settings and perspectives. We also discussed the main differences between the two to help you understand each party’s role in the business’s day-to-day operations.