Page 171 - Introduction to Business

CHAPTER 4 Small Business and Entrepreneurship 145

ration has limited liability, but is taxed as a partnership and therefore avoids the
double taxation of earnings. Earnings are not taxed on the corporate level;
instead, they are passed through to shareholders as dividends and taxed only as
their personal income. Only domestic firms with less than 75 shareholders are
allowed to be S corporations in the United States, so S corporations tend to be
fairly small in size.
Finally, the limited liability company (LLC) combines the corporate advantage limited liability company (LLC) A type of
of limited liability protection with only the personal taxation of a partnership or S corporation that combines the
corporate advantage of limited liability
corporation. LLCs are owned by their members, who are analogous to partners in a protection with the personal taxation of
partnership or shareholders in a corporation, depending on how the LLC is set up. a partnership or S corporation
However, if an LLC member participates in the firm’s management, profits become
subject to self-employment tax.
The franchise is another form of business corporation. A corporation can offer franchise An authorization by a
franchises to individuals that allow them to participate as an owner-manager in the corporation to individuals that allows
them to participate as an owner-
firm. McDonald’s Corporation, KFC (Kentucky Fried Chicken) Corporation, and
manager of a branch entity of the
Subway have retail food franchises; Holiday Inn Worldwide and Best Western have corporate firm
hotel franchises; and Jiffy Lube International, Radio Shack, and Mail Boxes Etc. are

Case in Point

Franchising: A Way for Small Business and Large Business
to Work Together

Many small businesses are franchise Shortly thereafter, the firm was awarded a franchise
members of larger corporations. Car dealerships are by another automobile franchising organization.
highly visible, small franchise businesses in most Expanding their local business further, the firm in
towns and cities. They offer a way for small local recent years has benefitted from the merger of
enterprises to participate within a larger corporate Chrysler Corporation and Daimler-Benz to form
firm. Indeed, most car dealerships are owned and DaimlerChrysler. Changing their name to Brown
operated by local small businesspeople. DaimlerChrysler, the franchise added luxury German
Consider the small business history of Brown cars to its product line.
Chrysler. Although a true story, we have changed the Kinkade and Baumgartner operated their small
names and some details to protect privacy. In 1960 business franchise until 2000. At that time Kinkade’s
George Kinkade Sr. and James Baumgartner, long- son John purchased more than 50 percent of the
time partners in several businesses in the local com- firm’s stock from his father and his father’s business
munity, opened a small used car lot. Broken-down partner. The family-owned business found that fran-
cars were towed from the surrounding region, chising not only reduced their business risk but
repaired and repainted at their car lot, and then sold allowed faster growth than otherwise possible.
as used cars. Typical financing was simple; a small
down payment and weekly payments of 10 to
Questions
20 dollars was enough to buy one of their cars!
In 1962 they leased an abandoned property in 1. Choose a small business franchise in your area
town and installed repair and painting facilities to and write a two-page report that summarizes its
expand their automobile renovation business. The founder(s), owner(s), business activities, and
next year they incorporated their firm under the growth over time.
name Car Repair and Sales. In the mid-1960s the cor- 2. What are the main advantages of owning and
poration moved to a new location and began to stock managing this franchise organization?
more expensive automobiles that were financed by 3. What are the main disadvantages of owning and
the local banks. managing this franchise organization?
In 1972 the small corporation applied for a
Chrysler franchise under the name Brown Chrysler.

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