The McGee Cake Company has been in business since early 2005. The company is a sole proprietorship. They produce a variety of full line cakes and other cake including cheesecake, lemon pound cake, and double-iced, double-chocolate cake. In the past several years, the company has experienced sales increases due to features in magazines and this led to the company receiving orders from all over the world. Doc and Lyn McGee both had regular jobs and formed the company mainly due to outside interest. However, with the increase in sales and demand for their product worldwide they both quite their regular jobs and hired additional staff to handle the influx of the recent demands. The company still faced issues with cash flow and capacity and the company continued to produce as many product as its assets would allow. The demand for the goods and services have become to great for their current infrastructure and the company is looking for business options (Ross, Westerfield, & Jordan, 2013).
As mentioned previously, the company is currently operating as a sole proprietorship. According to our text, a sole proprietorship is a business owned by one person and it’s the simplest business to start and it the least regulated form of organization. The McGee’s keep all the profits in this type of business. However, the owner has unlimited liability which means creditors can look beyond business assets to personal assets for payment of debts. Sole proprietorship are limited to the owner’s life span which means which in the end hampers the business able to exploit new opportunities (Ross, Westerfield, & Jordan, 2013, p. 14). A limited liability corporation (LLC) operates and is taxed like a partnership but retain the limited liability for owners, basically making it a hybrid of a partnership and corporation. The Internal Revenue Service maintains oversight of LLC operations and if a business does not meet certain criteria it will be faced with double taxation penalties (Ross, Westerfield, & Jordan, 2013, p. 6).
There are several advantages and disadvantages of changing the McGee Cake Company from a sole proprietorship to a corporation. A corporation is the most important form of business in the Unites States. It’s a business created as a distinct legal entity composed of one of more individuals or entities. Personal assets are protected from lawsuits and debt collections. Corporations can borrow money, be sued, and even be a general or limited partner in a partnership owning stock in other corporations. A disadvantage is a corporation is legal person; it is not exempt from taxes. The corporation profits are taxed twice: once at the corporate level when they are earned and again at the personal level when they are paid out (Ross, Westerfield, & Jordan, 2013, pp. 5-6). Conclusion
Based on the information provided by the McGee Cake Company and the recent expansion of their business. I think the best type of business for their new growth would be a limited liability corporation (LLC). In a LLC, members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt which is similar to the liability protections afforded to shareholders of a corporation. Lastly, the start up costs for a LLC will not “break the bank” and they can be easy to operate (www.sba.gov/content/limited-liability-corporation-llc).
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2013). Fundamentals of Corporate Finance.
New York, NY, USA: McGraw-Hill Irwin.
www.sba.gov/content/limited-liability-corporation-llc. (n.d.). Retrieved May 10, 2014, from
U.S. Small Business Administration: www.sba.gov