McGee Cake Company Mini Case

Advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC

Advantages

The McGee Cake Company may enjoy benefits from a Limited Liability Company as it does not have a legal responsibility and this means that members cannot be held liable for company’s debt.  In addition, LLC enjoys profit through taxation in that taxes are straightforward or in other words the company is allowed to select whether it should be taxed as a partnership or as a sole proprietorship (Warda, 2007). On the same note, the company is not liable for federal taxes.  Thirdly, it has a limitless ownership and this means that there are no legal structures imposed in LLC and so the company can have as many members as possible.  Fourth, LLC has an effective management structure since it does not require formal minutes or annual meetings and so LLC can be managed by members or hired manager (Warda, 2007).

Disadvantages

In LLC, building capital is low since it cannot be issued with stock to increase funds.  Since there is no strict corporate structure,   investors may fail to contribute their money to LLC.  Secondly, it requires higher fees such as fees for annual report.  It is also hard to transfer the LLC ownership and LLC can break up if a member has a bankrupt or dies (Warda, 2007). Third, LLC does not have a case law which may protect the business in case of any liability from business practices.  Other problem with LLC arises from taxation where the business can pay a high amount of tax as a result of business models, business nature and personal income.

 

Advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation

Advantages

The McGee Cake Company may enjoy benefits from a corporation since this is a legal entity business under state laws and its shareholders are not liable for business debt and personal assets are protected from debts.  Corporation has a higher amount of starting capital as it can get money from selling shares and stock markets (Mancuso, 2009).  There is an easy transfer of ownership as the owner is issued with share certificates.  Corporate business has a perpetual existence and this indicates that there is no life limit since the   change and death of ownership does not affect the business.  Since the business is a single-entity, it has no tax liabilities and the business pays taxes from personal tax return.

Disadvantages

            Corporate business requires a high cost for running the business.   There is a complex process from the regularity authority which demands the completion of certain requirements.  For example, the incorporation paperwork requires the business to high an accountant which may need a high cost for completion (Mancuso, 2009).  Secondly,   a corporate business meets challenges from agency problems. Since   corporation shareholders assign functions to board of directors who then hire managers, the problem arises when then hired managers perform their roles with own interest rather than corporation interest.

 

Recommendation

I would recommend that McGee Cake Company should change the business to corporation since this is the best decision. This is because, the company has already gained a reputation and there is a high demand for the product and therefore corporation will help the company to reach the potential customers since it will live forever (Mancuso, 2009).  Corporation will encourage the members to invest their money and buy stocks   in order to meet the global demand and gain competitive advantage.   It is important to note that a legal business structure with legal entity with have a limited liability and it is easy to transfer the business with credibility with respect to the law. In addition, the company will enjoy benefits from tax gain such as health insurance premiums and life insurance (Mancuso, 2009). Corporation will help the company to establisha professional identity which will increase credibility and prove legitimacy to global customers.

 

 

 

 

 

 

 

 

Reference

Mancuso, A. (2009). Incorporate your business. Berkeley, CA: Nolo.

Warda, M. (2007). The LLC and corporation start-up guide. Naperville, Ill: Sphinx Pub.