The McGee Cake Company Sole proprietorships are usually very small businesses that have limited access to financial resources. Business credit is often reserved for larger, more established businesses that have a legal structure in place, such as a corporation or a limited liability company. A limited liability company (LLC) is a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. Question1: What are the advantages & disadvantage of changing the company organization from a sole proprietorship to an LLC? Advantages The main advantage gained by shifting from a sole proprietorship to a more formal organization type is liability protection. A sole proprietor is personally accountable for the debts and liabilities that his business generates. This means that his personal assets are in jeopardy if the business were to ever incur a large liability due to a lawsuit. However, business organizations such as Limited Liability Companies (LLCs) and corporations allow an individual to protect his personal assets from business liability using a corporate liability shield. Only the assets owned by the business are at risk to business liabilities in these organizations; the assets outside of the business generally cannot be claimed to settle business debts. Also, sole proprietors are, by definition, businesses with one owner. By becoming an LLC or corporation, you provide yourself with an easy way to bring a number of investors and partners into your business. Disadvantage State Filings Unlike sole proprietorships, LLCs and corporations need to file documentation with the state in which they are headquartered before they can exist. In addition, most states require annual filings by these organizations to keep the Secretary of State aware of the business’s activities. Each filing often requires a small fee, and failure to file can cause the business to incur penalties or can even cause the state to revoke the enterprise’s ability to do business. Disadvantages - Taxes A sole proprietorship allows the owner to directly include all of his business income on his personal return without filing any additional documentation. LLCs and corporations have to file returns separate from their owners regarding annual income. A corporation even has to pay tax on the income it generates during the year, and then the IRS charges an additional levy on any corporate distributions to the taxpayer. The exception to the additional filing requirement is the single member LLC. If this type of LLC is taxed as a partnership, the owner can classify the LLC as a “disregarded entity” for tax purposes and record all of the business’s income on his personal tax return, as he would if he were a sole proprietor. Question 2: What are the advantages & disadvantage of changing the company organization from a sole proprietorship to Corporation? Being an LLC is a limited liability company, which is a hybrid of a sole proprietorship and corporation. They are taxed like a partnership but it keeps them from having to cover debts personally, and they can get out double taxation as long as they meet certain criteria from the IRS.2.What are the advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation? A sole proprietorship has its advantages because it allows them to keep all of the profits ,however, this also means that they are entitled to all of the businesses debts as well. They have an unlimited liability for its debts meaning that their personal assets can be used by creditors for payments. When it is a sole proprietorship, another disadvantage is that the company or business is only alive for as long as the owner is, making it hard to transfer it to a new owner because the whole business must be acquired. It also limits them from being able to venture or expand onto new ideas. A corporation is separate from its owners and has the rights of those like a person. They have to follow certain bylaws to regulate it, but can have ownership transferred with ease. However, a disadvantage would be that they have a double taxation, meaning that they are taxed twice.
