Question

Buck and Sally Starnes formed the Starnes Pie Cooperative.  The company makes pies, all kinds of pie, with a specialty in Derby Pie, but has an assorted collection of fruit pies, meringues, and even a Boston Cream Pie that is to die for.  At first, the couple operated the company out of their own kitchen and garage.  With some success, Buck and Sally eventually quit their “real” jobs to work on pies full time.  They hired several workers to help them process orders too.  They are currently operating at full capacity for the assets in the business, and it looks like pie demand is unstoppable.  Just last month, Kroger approached the couple to see about selling Derby Pie and Boston Cream Pie in the grocery stores and several restaurants are interested in making the couple’s pies a selling point on their menus.

Buck and Sally have operated the business as a sole proprietorship until now.  They have approached you to help them with the firm’s growth, and they want to know the pros and cons of staying as a sole proprietorship or moving to an LLC or to a corporation.  Help them make the decision be identifying the advantages and disadvantages of each.  What is your best advice of the final decision?

Answer 1

Proprietorship	LLC	Corporation
1. Proprietor has complete control over business decisions 2. Profits are completely enjoyed by Proprietor 3. Very few laws, rules and regulations to adhere to relative to other forms of business structures 4. It cannot raise funds huge capital as and when required 5. Proprietor has personal liability towards every obligation of the proprietorship	1. Flexibility of Taxation – as sole proprietorship, Partnership or Corporation – depending on its membership 2. Members of LLC may distribute profits among themselves as they agree upon irrespective of their capitals’ share/ownership – members can enjoy tax benefits depending division of profits. 3. Relatively costly to form, and more rules to comply than a proprietorship – register with state and pay registration and annual fees – follow laws governing LLCs 4. It can raise funds from public sources and has to raise funds through its members only 5. Here the liability of Members is limited (limit of liability depends on laws and agreements made) 6. Assets & Funds of Members and LLC are separate and cannot be intermingled as in a proprietorship	1. Completely limited liability for its members/owners 2. It can easily raise capital from public sources also 3. Company is taxable for its profits and Dividends paid to members are also taxed – double taxation 4. Separation of Management and Ownership usually exists – Depending of raising of finance and type of corporation, management structure varies 5. More Rules and Regulations to be followed. Record Keeping, Annual Meetings, Annual Returns Filing with State etc. 6. It has separate existence from its shareholders or owners and can continue its business of transferability of its stock

As the business is growing, it is better to form an LLC – which can provide an opportunity to add more members and enjoy flexibility towards taxation and limited liability features – keeping in mind costs towards keeping good records and Annual Fees and Formation Costs.

Note:

1. S Corp is also an alternative option but with additional corporate filings and costs

2. An LLC may be classified as S Corp for tax purposes only to avoid self-employment taxes. However, Tax Filing of S-Corp is more complicated than LLC