Running Header: CASE STUDY 1 The McGee Cake Company: A Case Study Submitter Instructor BUS Course 2012 CASE STUDY 2 Introduction The McGee Cake Company, owned by Doc and Lyn McGee, has been a sole proprietorship company since its inception in 2005 (Ross, Westerfield & Jordan, 2013, p. 18).
A sole proprietorship “is the least regulated form of organization” and has allowed the McGee’s to run their company largely as they see fit and to reap all the financial profits. However, the company’s recent growth has added additional financial burdens which have caused the McGee’s to revisit the company’s current form of organization (Ross, Westerfield, & Jordan, 2013, p. 5). To that end, the owners have approached me “to help manage and direct the [company since its fast growth has] led to cash flow and capacity problems” (Ross, Westerfield & Jordan, 2013, p. 8). What follows is information on “the advantages and disadvantages of changing the company’s organization from a sole proprietorship to an [limited liability company] as well as “the advantages and disadvantages of changing the [company’s current form of business organization] to a corporation” (Ross, Westerfield & Jordan, 2013, p. 18). In addition, the McGee’s have asked me for my recommendation as to which form of business organization I believe the company should undertake and the reasons/rationale behind my recommendation.
CASE STUDY 3 Key Issue The one key issue that has led the McGee’s to consider moving the company from a sole proprietorship to a limited liability company or that of a corporation is the company’s recent rapid growth. This growth has presented both opportunities and challenges for the company as a whole.
Specifically, “sales have exploded” since The McGee Cake Company was recently featured in “a leading specialty food magazine” (Ross, Westerfield & Jordan, 2013, p. 18). While this growth has allowed the McGee’s to use the company’s revenues as their sole source of income, it has increased their need for capital as they have had to hire “additional workers to meet the demand” (Ross, Westerfield & Jordan, 2013, p. 18). Also, additional capital will be needed to purchase more assets in an effort to keep up with the company’s continuing growth (Ross, Westerfield & Jordan, 2013, p. 8). Under the current business form these two increased expenditures—payroll and assets–are the sole financial responsibility of the McGee’s which may cause some financial stress since their available “equity… is limited to the amount of [their] personal wealth” (Ross, Westerfield, & Jordan, 2013, p. 5). This growth has also presented the McGee’s with the opportunity to enter into business with “a national supermarket chain [that has proposed] to put four of [the McGee’s] cakes in all of the chain’s stores” (Ross, Westerfield & Jordan, 2013, p. 18).
In addition, the McGee’s have been approached by “a national restaurant chain [in regards to] selling McGee cakes in its restaurants” (Ross, Westerfield & Jordan, 2013, p. 18). Again, under sole proprietorship the company may miss out on these opportunities “because of insufficient capital” to expand the business assets (Ross, Westerfield & Jordan, 2013, p. 5). For example, if the McGee’s do not have the capital to purchase more ovens they may not be able to keep up with the increased demand from the supermarket/restaurant chains, potentially causing both business ventures to fail.
In order for the company to capitalize on its current growth the McGee’s need to be informed of the advantages and disadvantages of other forms of business organizations to determine which will best suit their needs for both the short- and long-term. CASE STUDY 4 Advantages and Disadvantages of Changing from a Sole Proprietorship to a Limited Liability Company “The goal of [a limited liability company] is to operate and be taxed like a partnership but retain limited liability for owners” (Ross, Westerfield & Jordan, 2013, p. ). Thus “[t]he main advantage gained by shifting from a sole proprietorship to a more formal organization [whether it be a limited liability company or a corporation] is liability protection” (Cromwell, n. d. , n. p. ). Under sole proprietorship the McGee’s have “unlimited liability for [their] business debts” (Ross, Westerfield & Jordan, 2013, p. 5). This means that if their business owes creditors and the McGee’s are unable to pay with business assets the creditors can demand payment via the McGee’s personal assets (Ross, Westerfield & Jordan, 2013, p. ). In contrast, under a limited liability company the McGee’s personal assets would be protected “from business liability” (Cromwell, n. d. , n. p. ). Additionally, the McGee’s must rely on their own personal wealth in an effort to raise equity whereas a limited liability company affords the business “to bring a number of investors and partners” on board in an effort to raise capital (Ross, Westerfield & Jordan, 2013, p. 5; Cromwell, n. d. , n. p. ).
Hence, the limited liability company will provide them with the capital they require to increase their business assets in order to keep up with the high demand for their products. In terms of taxes the McGee’s currently report their personal and business taxes as one. Under a limited liability company they will no longer be able to claim their business income on their personal filings; separate tax returns would have to be filed for both their personal income and their business income (Cromwell, n. d. , n. p. ).
Moreover, the McGee’s would have to file documentation with the state prior to their company being able to claim limited liability status. The taxes and state filing issues, in my professional opinion, should not be viewed as detractors. The benefits the company will reap (e. g. , ability to raise capital) certainly outweigh the annual taxation preparation and filing with the state to ‘establish’ the limited liability company. CASE STUDY 5 Advantages and Disadvantages of Changing from a Sole Proprietorship to a Corporation
Some of the advantages of forming a corporation are, in contrast to sole proprietorship, “owner-ship [of a corporation] can be readily transferred” (Ross, Westerfield & Jordan, 2013, pp. 5-6). Also, like a limited liability company, a corporation has “limited liability for the company’s debts and [stockholders] can only lose what they have invested” (Ross, Westerfield & Jordan, 2013, p. 6). In addition, unlike sole proprietorship, a corporation an unlimited [business] life” (Ross, Westerfield & Jordan, 2013, p. ). For these reasons, a corporation is a superior form of business organization for raising capital (Ross, Westerfield & Jordan, 2013, p. 6). Along with the advantages of forming a corporation comes the main disadvantage: taxation. Corporations must deal with double taxation “meaning that… profits are taxed [at both] the corporate level when… earned and again at the personal level when they are paid out” (Ross, Westerfield & Jordan, 2013, p. 6).
While a corporation provides many advantages the tax disadvantage that comes with it currently outweighs those advantages. CASE STUDY 6RecommendationWith The McGee Cake Company’s rapid growth it is in need of changing its form of business organization. In particular, the McGee’s “need enhanced protection for [their] personal assets from business obligations and liabilities as well as a better vehicle to attract investors” (Cromwell, n. . , n. d. ). Therefore, after carefully weighing the advantages and disadvantages of changing from a sole proprietorship to a limited liability company or that of a corporation my recommendation is for the former. Becoming a limited liability company will benefit them greatly since it provides limited liability in that their personal assets will be separate from their business assets, thus protecting their personal assets from creditors seeking payment if such a situation should ever arise.
Becoming a limited liability company will also allow the McGee’s to raise equity through partners and investors. Since the McGee’s are in need of additional capital to purchase new business assets in an effort for them to keep up with the current demand for their products a limited liability company would allow them this advantage. Since this rapid growth may continue the McGee’s may want to revisit becoming a corporation. However, my recommendation is for them to take the next logical and less daunting step and become a limited liability company for the reasons stated above.
CASE STUDY 7 References Cromwell, J. (n. d. ). Demand Media: The Advantages and Disadvantages of Changing the Company Organization from a Sole Proprietorship. Retrieved from http://smallbusiness. chron. com/advantages-disadvantages-changing-company-organization-sole-proprietorship-24632. html Ross, S. , Westerfield, R. , & Jordan, B. (2013). Fundamentals of Corporate Finance (10th ed. ). McGraw-Hill/Irwin: New York, NY