The Diwale Cake Company - Research Paper Example

Diwale Cake Company Sole Proprietorship vs. LLC In considering whether the Diwale Cake Company should move from a sole proprietorship to an LLC there are a number of important elements that one must take into consideration. In these regards, there are a number of advantages and disadvantages that must be considered. One of the major advantages of the LLC form over the sole proprietorship form is indicated in the LLC name, mainly that this form allows for limited liability among businesses. For instance, if Diwale were to find themselves in a large amount of debt, the owners of the company could only be held responsible in a limited capacity.

Another advantage of the LLC format is that it allows owners to allocate their tax structure differently. For instance, in this format the IRS lets the companies decide whether they will be taxed as a partnership or a corporation. In addition to these elements, Diwale would also be able to record profit and loss differently than in a sole proprietorship. Still there are a number of direct disadvantages to the LLC format. If Diwale decided to remain in a sole proprietorship there would be a great amount of advantages they would retain however.

In these regards, Diwale would be able to remain in complete control of the elements of their business, most notably financial elements. Still, the sole proprietorship has the disadvantages of complete liability if the business experiences hardship and experiences debt. In these situations, owners must assume all responsibility. 2. Sole Proprietorship to a Corporation In considering whether Diwale should switch from a sole proprietorship to a corporation, there are a number of advantages and disadvantages that must be considered.

In switching to a corporate structure Diwale would reduce the liability they face for potential debts. In these regards, the corporation structure, like the LLC, would limit the two owner’s responsibility if the company potentially faced growing debt responsibilities. Another important advantage of the corporate structure is that corporations are able to sell stock to raise capital for future investments. In respect to Diwale, it’s not clear that this would be a major benefit as issuing stock is greatly a benefit that large scale companies resort to.

Some of the other advantages of this format are the tax benefits that corporations receive. One such advantage is that corporations can deduct the cost of benefits it provides its employees. The overall tax structure for corporations is also better for sole proprietorships, as the graduated tax rate is better for corporations. In addition to these advantages, there are some disadvantages. The primary disadvantage of this format is that it requires more monetary investment than any of the other forms of organization; there is also a much greater amount of paperwork.

Furthermore, while corporations receive tax advantages, overall they may end up paying higher tax levels. This is not because of higher tax rates, but because of increased elements that taxed must be paid upon, most importantly increased dividend taxes. 3. Recommendation In considering the organization direction that Diwale should assume a limited liability corporate structure. There are a number of reasons for deciding on this organizational direction. While changing to a corporation is a viable option for Diwale, especially considering that they have gain product placement in a number of franchises, it appears at this stage in their development they are not at the level that would necessitate adopting the corporate structure.

In addition, they do not face capital issues that would potentially necessitate they issue stocks to gain increased funding options. Furthermore, switching to a corporate structure would raise increased capital responsibilities, as well as a significant amount more paper work. Still, it’s also clear that a sole proprietorship does not make financial sense. In these regards, one must consider the expanding nature of the business. In expanding, it is necessary for Diwale to hire more employees and take on more financial responsibility.

In these regards, there are a number of prominent benefits the limited liability corporate structure will hold for Diwale’s expansion. One of the most prominent reason is that in assuming this organizational direction the two owners of Diwale will be able to avoid the liability they would face if their expansion plans go bad and they face debt responsibilities. This would allow Diwale to expand into their next level of growth in a careful and cautious way, and enjoy the organizational benefits of the limited liability format.