Case Study
Chapter 1 Case
The McGee Cake Company
Q1: What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC?
Since the company’s inception, the McGee’s have operated The McGee Cake Company as a sole proprietorship which has provided them with several key advantages. The first among these advantages is the relative ease with which the McGee’s likely experienced in starting their business where essentially they were only required to secure the necessary licenses, tax identification numbers, and certifications to begin conducting business. In contrast, the requirements to start a LLC are quite a bit more extensive. Although less extensive than other corporate entities, establishing and maintaining an LLC requires that the owner form and register the LLC entity with the appropriate state agency. Next, the owner must draft and file articles of organization with secretary of state’s office along with paying a substantial filing fee that can be on the upwards of several hundred dollars. This LLC filing will have to include the LLC’s name, principal office’s location, the owner’s name or names, the expected term of the LLC, and any other state mandated information. Additionally, since the McGee’s would operate as co-owners of the company, they would be required to draft an operating agreement which details the each of their duties, capital contributions, and rights to profits.
Another key advantage of the sole proprietorship is the owner’s freedom to make decisions and direct the course of action for the future of the business. Up to this point, the only deliberation on major decisions has been amongst the McGee’s themselves; however, this freedom has come at a cost. Due to some favorable exposure in the media, the McGee’s have experienced an explosion in demand, and despite their best efforts, they have fallen short of meeting this demand due to cash flow and operating capacity problems. As a sole
The McGee Cake Company
Q1: What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC?
Since the company’s inception, the McGee’s have operated The McGee Cake Company as a sole proprietorship which has provided them with several key advantages. The first among these advantages is the relative ease with which the McGee’s likely experienced in starting their business where essentially they were only required to secure the necessary licenses, tax identification numbers, and certifications to begin conducting business. In contrast, the requirements to start a LLC are quite a bit more extensive. Although less extensive than other corporate entities, establishing and maintaining an LLC requires that the owner form and register the LLC entity with the appropriate state agency. Next, the owner must draft and file articles of organization with secretary of state’s office along with paying a substantial filing fee that can be on the upwards of several hundred dollars. This LLC filing will have to include the LLC’s name, principal office’s location, the owner’s name or names, the expected term of the LLC, and any other state mandated information. Additionally, since the McGee’s would operate as co-owners of the company, they would be required to draft an operating agreement which details the each of their duties, capital contributions, and rights to profits.
Another key advantage of the sole proprietorship is the owner’s freedom to make decisions and direct the course of action for the future of the business. Up to this point, the only deliberation on major decisions has been amongst the McGee’s themselves; however, this freedom has come at a cost. Due to some favorable exposure in the media, the McGee’s have experienced an explosion in demand, and despite their best efforts, they have fallen short of meeting this demand due to cash flow and operating capacity problems. As a sole