Question

MINI CASE

TTHE OZZIE CAKE COMPANY

IN EARLY 2012, Harry and Anne Ozzie formed the ozzie cake company. the company produced a range of cakes, and its specialities included pavlova, lamingtons and sponge cake. the couple formed the company as an outside interest, and both continued work at their current jobs. Harry did all the cake baking and Anne did all the distribution. with good product quality and a sound marketing plan the company grew rapidly. In early 2015 the company was featured in an entrepreneurial magazine. Later that year, the company was featured in Gourmet cake, a leading speciality food magazine. After the article appeared in Gourmet cake, sales exploded and the company began receiving orders from all around Australia.

Because of the increased sales, Harry left his other job, followed shorlty by Anne. The company hired additioanl employees to meet demand. Unfortunately, the fast sales experienced by the company led to cash flow and capacity problems. The company is currenlty 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 two of their cakes in all their stores, and a national fast food chain has contacted the company about selling the pavalova in their outlets. the fast food company would sell the pavaloa under its own name rather than the ozzie brand name.

Harry and Anne have been operating the company as a sole trader. they have approached you to help manage and direct the company's growth. Specifically they have asked you to answer the following questions.

questions

1. What are the advantages and disadvantages of changing the company organisation from a sole trader to a limited company?

2. What are the advantages and disadvantages of changing the company from a sole trader to a partnership?

3. Ultimately what would you recommend the company do : change structure to incorporate or not, and why?

Answer 1

1. Advantages of conversion from Sole trader to Limited Company are as:

i. Limited Liability

ii. Corporate tax benefits

iii. Company is seperate entity

iv.  Limited Company has perpetual succession

v. Higher value in market in case of M&A

Disadvantages are as:-

i. Easier decision making in sole trading

ii. No legal requirements unlike Companies Act

iii. No additional cost of filing returns etc. as a Company Act

iv. No audit requirement

2. Advantages of conversion from Sole trader to Private are as:

i. Can be formed as Limited Liability

ii. Least regulations and seperate entity benefit

iii. Sharing the burden

iv. Better decision-making

Disadvantages are as:-

i. Easier decision making in sole trading

ii. No legal requirements unlike Companies Act

iii. No additional cost of filing returns etc. as a Company Act

iv. No audit requirement

3. The business growth demands change in the structure of the business and how they are run. If there is no growth and owner does not want to share benefit with others than it is advisable to remain as sole trader or form a sole member Company to restrict liability.

However, it is advisable to form Partnership if the business growth is not exponential and business owners wants to remaind in saddle of busines but wants to share the burden of operations with others.

In case business is growing fast and there is potential of M&A to earn value appreciation then it is advisable to form a Limited Company.