Question

The McGee Cake Company I n early 2010, Doc and Lyn McGee formed the McGee Cake Company. The company produced a full line of cakes, and its specialties included chess cake,* lemon pound cake, and double-iced, double-chocolate cake. The couple formed the company as an outside interest, and both continued to work at their current jobs. Doc did all the baking, and Lyn handled the marketing and distribution. With good product quality and a sound marketing plan, the company grew rapidly. In early 2014, the company was featured in a widely distributed entrepreneurial magazine. Later that year, the company was featured in Gourmet Desserts, a leading specialty food magazine. After the article appeared in Gourmet Desserts, sales exploded, and the company began receiving orders from all over the world. Because of the increased sales, Doc left his other job, followed shortly by Lyn. The company hired additional workers to meet demand. Unfortunately, the fast growth experienced by the company led to cash flow and capacity problems. The company is currently producing as many cakes as possible with the assets it owns, but demand for its cakes is still growing. Further, the company has been approached by a national supermarket chain with a proposal to put four of its cakes in all of the chain's stores, and a national restaurant chain has contacted the company about selling McGee cakes in its restaurants. The restaurant would sell the cakes without a brand name. Doc and Lyn have operated the company as a sole proprietorship. They have approached you to help manage and direct the company's growth. Specifically, they have asked you to answer the following questions: QUESTIONS What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC? What are the advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation? Ultimately, what action would you recommend the company undertake? Why?

Answer 1

Sole Proprietorship:

It is a business owned by one person. It is the cheapest way to start a business. A few government policies and regulations must be satisfied for the industries.It gives relaxation from corporate income tax and all profit from business taxes are considered as personal income.It has unlimited liabilty for business debt and obligations also there is no difference between personal and business assets. The life of sole proprietorship is limited by life of sole proprietor. The money can be raised by the proprietor is limited to his/her personal wealth.

Corporation:

It is a form of Business enterprise. It is distinct legal entity. it has perpetual succession, also transfer of ownership, and liabilty is also limited. It can have a name and enjoy many legal power of natural persons. The major disadvantage of incorporation is that tax is imposed on corporate income by the federal government is high as well as the shareholder should pay personal income tax on dividend income they receive.

Limited Liabilty Company:

LLC is a new form of organisation, evolved with the goal to operate and taxed like a partnership but retain limited liabilty for owners. So LLC is a bridge of Partnership and Corporation. The Internal Revenue Service considers an LLC, a corporation, unless it meets certain specific criteria. LLC become common due to its advantages.

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

• Reductio of personal liabilty: A sole proprietor has unlimited liability so it can include potentila loss of his all personal assets. A LLC has a limited liabilty upto the extend of its own assets.
• Taxes will reduce
• The credibility of business will be increased
• The sole proprietorship can no go for public issue, whre as LLC can Raised capital the sale of equity.
• Sole proprietor has limited life whre as LLC has a continuos life.

Disadvantages of changing the company organization from a sole proprietorship to an LLC

• The potential cost involved in LLP
• in LLC requirement of employee, time , cost and compliances with government regualtions also considerd.

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

• Limited Liabilty: There is a limited liabilty under the corporation. the liabilty of the shareholder is limited . so major benefit is given.
• Increased Credibility: it can increase its business credibilty.
• Trannsfer of ownership: Under corporation transfer of ownershipcan be quited easy than others.
• Generate capital through Public: Corporation can raised capital through public issue.

Disadvantages of changing the company organization from a sole proprietorship to a corporation:

• High Cost: under the corporation requiremnt of employees, timing all are increased.
• High Taxes: Corpoartion has to pay tax on income its generate during the year.
• Filling cost: Corporation has to fill various documents, forms so it can increase filling cost.

As per my recommendation the Company undertakes the following steps:

Corpration has sold their items by using their brand name so it can increased its brand value in the market. Also its increase its credibilty in the market. Afer that Corporation has to raised capital through public issue. And hired the employees for the running business. So above mention steps shoulb be taken by corporation.