The primary advantage to shifting to an LLC is one of liability: as a sole proprietorship, if the business fails, both Doc and Lyn are liable for all of McGee Cakes' debts. Most small businesses fail, and the fact that the company is having financial difficulties, despite high demand, suggests that it would be wise for the McGees to protect their personal assets. The food business can be very 'faddish.' Success early on in a business venture related to food does not necessarily bode well for success in the future. Additionally, the McGee's cash flow problems are epidemic amongst sole proprietorships. Credit markets are particularly tight right now, and sole proprietorships have the greatest difficulty of all of the different business structures in raising funds.
The main advantage of maintaining a sole proprietorship is how easy it is to set up compared with an LLC. Filing taxes is also easier, as to file as a sole proprietor the McGees need only file an individual income tax return and itemize their company' losses and profits. Yet while "the looser structure of a proprietorship won't require financial statements and maintaining company minutes as a corporation," the McGee's lack of financial know-how might make it overly tempting for them not to use proper accounting controls (Zahorsky, 2009, Sole proprietorship). Given their financial risk, getting a lawyer to negotiate the terms to set up an LLC would likely be worth the money and time. "To establish an LLC you must also incorporate" which requires filing Articles of Incorporation and the assistance of an attorney to write the LLC's founding documents. But LLCs "have the choice of paying taxes as a partnership, corporation, or sole proprietorship. For individuals who do not meet the criteria for an IRS S-corporation, this may reduce their tax burden" (Zahorsky, 2009, Types).
2. What are the advantages and
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