Cake Case the Mcgee Cake

CAKE CASE

The McGee Cake Company

Mini cake case: Chapter 1

Mini cake case: Chapter 1

In early 2001, Doc and Lyn McGee formed the McGee Cake Company. The company produced a full line of cakes, and its specialties included chess cake, lemon pound cake, and double-iced, double chocolate cake. The couple formed the company as an outside interest, and both continued to work at their current jobs. Doc did all the baking, and Lyn handled the marketing and distribution. With good product quality and a sound marketing plan, the company grew rapidly. In early 2006, the company was featured in a widely distributed entrepreneurial magazine. Later that year, the company was featured in Gourmet Desserts, a leading specialty food magazine. After the article appeared in Gourmet Desserts, sales exploded, and the company began receiving orders form all over the world.

Because of the increased sales, Doc left his other job, followed shortly by Lyn. The company hired additional workers to meet demand. Unfortunately, the fast growth experienced by the company led to cash flow and capacity problems. The company is currently producing as many cakes as possible with the assets it owns, but demand for its cakes is still growing. Further, the company has been approached by a national supermarket chain with a proposal to put four of its cakes in all of the chain's stores, and a national restaurant chain has contacted the company about selling McGee cakes in its restaurants. The restaurant would sell the cakes without a brand name.

1. What are the advantages and disadvantages of changing the company organization for a sole proprietorship to an LLC?

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.