The McGee Cake Company case study presented a situation where a sole proprietorship is being forced to make a tough decision due to its rapid growth. The McGee’s simply do not have the resources to meet the demands of their cliental. Therefore, they must look into restructuring their business in effort to remain afloat. As their business advisor, I would carefully explain the three different legal forms of business organization (sole proprietorship, partnership and corporation). I would begin by informing them of their current legal form of business which is sole proprietorship. Seeing the fact that they are currently operating under this entity, they should be aware of its advantages such as retaining all profits once debt has been paid. Therefore, it would be imperative to focus on the disadvantages because it is a direct link to their problems. Disadvantages like being unlimited liable for all business debts and insufficient capital for new opportunities.
Upon learning the disadvantages of their sole proprietorship, I would expect the McGee’s to inquire about the other legal forms of business organizations. There, I would take the opportunity to inform them of a limited liability corporation (LLC), and some of its advantages/ disadvantages. The main attraction of an LLC is its limited liability status. The LLC would limit their personal liability from business debts and damages incurred by the business. Another advantage is tax benefits. The tax rate for a corporation is more favorable, and personal liability is reduced. This structure also allows more flexibility for profit and loss. Speaking of profits and loss, the McGee’s may split up LLC profits and losses any way they wished, as long as it is provided for in the operating agreement. A couple of known disadvantages the McGee’s should be aware of is that LLC’s must pay annual fees and make periodic filings