The Ozzie Cake Company - Essay Example

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The advantages of changing a company organization from a sole trader to a limited liability company are that the company becomes a separate legal entity and the shareholders are not personally liable to pay of the company’s debt. …
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The Ozzie Cake Company
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THE OZZIE CAKE COMPANY The advantages of changing a company organization from a sole trader to a limited liability company are that the company becomes a separate legal entity and the shareholders are not personally liable to pay of the company’s debt. In a sole trader organization the owners are exposed to unlimited liability and if the company defaults on its loan repayments then owners are personally liable to pay the debt. Another advantage of Limited Liability Company is that it provides a great deal of flexibility in the case of taxation. LLC can be taxed as a sole trader, partnership or corporation. It has the option to choose which makes the company highly flexible and avoid double taxation. The disadvantage of the changing an organization from sole trader to a limited liability is that it is more expensive to create compare to a partnership or sole proprietorship. Renewal fees for a Limited Liability Company are high which leads to a rise the costs of the company which may have a negative effect on the future cash flows of the company and the company might face losses due to such costs. Another disadvantage of a LLC is that its paperwork is more complex than of a sole trader or a partnership. The advantage of changing a company organization from a sole trader to a partnership is that it helps in raising more finance for the company. Partnership not only helps in raising more capital but partners are also able to bring in variety of individual skills which helps in taking the organization forward. In case of a sole trader, the entire burden is one or two individuals, but in the case of partnership the burden is distributed and the partners are better able to concentrate on their areas of specialization. The disadvantage of changing a company organization from a sole trader to a partnership is that the profit has to be distributed among the partners. It becomes a problem when deciding how to value each individual’s skills and time. Another disadvantage is that the threat of unlimited liability is still present. Disagreements also become a part and parcel of the game which may lead to disharmony among the partners. Since the company is facing cash flow and capacity problems, it will eventually have to take debt to finance its growth. If the company remains a sole trader or even if it becomes a partnership, the owners will face unlimited liability. So being a sole trader or partnership will be a risky option. If we see the demand of its products, it is very good. It is being approached by big names. It is recommended that the company becomes a limited liability company. In this way they will be able to raise capital easily since it will be well documented. With more capital, the company will be able to grow and fulfill the demand. They will be able to bring in management expertise to run the business in a professional manner as well. Even if things turn out bad, then the shareholders will not be personally liable to pay the debt. CADIA EAST GOLD MINES 1. Year 0 1 2 3 4 5 6 7 8 9 Cash Flow ($ million) -500 60 90 170 230 205 140 110 70 -80 Cumulative Cash Flow ($ million) -500 -440 -350 -180 50 255 395 505 575 495 Payback period = 3+ (180/230) Payback period = 3.78 years The IRR for this problem is not a suitable measure because this project has unconventional cash flows i.e. an initial cash outlay is followed by cash inflows and then a cash outlay occurs. 2. The company should open the mine. The analysis shows that the project has a positive NPV and has a payback period of 3.78 years, which means that the initial costs will be recovered in 3.78 years. The IRR is a weak measure as compared to the NPV. However, still since the IRR is above the required rate of return, we still will go for the project. So all the measures are saying that the project is worth starting. Works Cited Anon., n.d. A private limited company advantages versus sole trader basic accounts. [Online] Available at: "" [Accessed 5 August 2011]. Anon., n.d. Partnership Advantages and Disadvantages. [Online] Available at " [Accessed 5 August 2011]. Brigham, E.F. & Ehrhardt, M.C., 2005. Financial Management: Theory and Practice. USA: South-Western Cengage Learning. Brigham, E.F. & Houston, J.F., 2004. Fundamentals of Financial Management. South-Western Thomson. Staub, D.K., n.d. LLC Advantages. [Online] Available at: "" [Accessed 5 August 2011]. Stowe, J.D. & Gagne, J.R., 2010. Capital Budgeting. In Corporate Finance and Portfolio Management - CFA Program Cirriculum Volume 4. Pearson Custom Publishing. pp.5-38. Read More
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