As the volume of business and scale of operations have increased, there would be a substantial increase in the borrowings and debts required to keep up with the pace of production demands. In such a case, mitigating the risks of loss through LLC is a beneficial option over sole proprietorship. With increasing scale of operation, the choice to operate under sole proprietorship will make you liable for all the risks incurred personally. In case of any incident resulting in losses, these will show up as personal credit.
Whereas in LLC, these would not be reflected on personal credit but instead filed separately for the company as a separate legal entity. You need the liability protection mainly because you have employed additional workers and you need to be protected from any losses resulting from errors or mistakes on their part. This, in the least, would ensure that your personal assets are insured in case the company incurs some losses. Credit and Taxation
Since you are already experiencing cash flow and capacity problems, for an impending need for expansion in near future, raising capital under LLC would be far easier for you. Under sole proprietorship, your own credit history is the only criteria available for financing firms to evaluate credit risks attached. In case of LLC, especially after it has been in business for some duration, the credit record of the company would be taken in consideration to evaluate credit worthiness. Being a separate entity than you, getting financed would thus become easier under LLC.
While there is less paperwork with a sole proprietorship, viewed in the context of tax benefits that are available to your firm, under LLC, your bottom line profit will not come under the purview of earned income and so will not accrue towards self-employment tax. While both sole proprietorship and LLC are liable for employee’s and employer’s portion of employment taxes, if the company were facing problems due to employment taxes, then the responsible parties would be held only for employee’s portion and not for employer’s portion.
Under LLC, your partners will invest their own capital to the venture and this may even reduce your needs for external financing to some extent. Not only this, they will also have expertise in distribution and the whole burden of supply chain will not have to be borne by you alone. Furthermore, under sole proprietorship, the hired staff might not be as motivated to succeed as partners in a LLC structure. The only disadvantage evaluated in the context of your current business transactions is that your freedom to make decisions would be curtailed under LLC.
The distribution of profits will also have to be clearly worked out beforehand among various partners. Also, since your cakes would be sold at supermarket chains and national restaurant without a brand name, the need to work out a legal framework under LLC to protect your interests against potential abuse can not be over-emphasized. Works Cited Mancuso, Anthony. “Form Your Own Limited Liability Company”, Nolo, 2007.