Not every business is able to achieve a stage where the demand for its product or services overflows the supply capacity. Despite that this moment generally means that the business has reached some heights of success, it can get overwhelming for owners to sustain it as a sole proprietorship at that level, thus, a structural change is required. The main advantage of shifting business structure from a sole proprietorship to an LLC is liability protection (Ingram, n.d.). Obviously, the entrepreneur can benefit a lot from securing their own finances and separating them from their company’s assets, however, limited liability structure implies additional annual expense, as well as state filings: unlike sole proprietorships, LLCs must compile an annual report so that the state is aware of the business’ activities (Ingram, n.d.). Additional taxes are also put in place for LLCs.
The move towards becoming a corporation has multiple aspects to it as well. It can be considered a next stage of LLC, as it becomes “a legal entity that is separate and distinct from its owners” (Internal Revenue Service, n.d.). The core benefit of a corporation business form is that it becomes fully independent of its owners and shareholders in regards to its actions. The cons of establishing a corporation lie in the costs to set it up, taxation (double taxation in case of C corporations), and increased government oversight.
Ultimately, I would advise the Nguyens to make Nom-Nom Cake Company into a LLC, and in the future, perhaps a corporation. By doing so, they will alleviate personal responsibility, while securing their financial situation in case of lawsuits. Judging by the increase in the demand for their services on the market, they are able to collect enough profit to expand their business and employ their first workers such as bakers and carriers. Thus, they will handle the stress of the lack of supply and stabilize the supply-demand scale, while still profiting and growing their company further.
Ingram, D. (n.d.). Regulations for Limited Liability. Chron. Web.
Internal Revenue Service (IRS) (n.d.). Definition of a Corporation. Web.