Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan
THE McGEE CAKE COMPANY
The advantages to a LLC are: 1) Reduction of personal liability. A sole proprietor has unlimited
liability, which can include the potential loss of all personal assets. 2) Taxes. Forming an LLC may
mean that more expenses can be considered business expenses and be deducted from the company’s
income. 3) Improved credibility. The business may have increased credibility in the business world
compared to a sole proprietorship. 4) Ability to attract investment. Corporations, even LLCs, can
raise capital through the sale of equity. 5) Continuous life. Sole proprietorships have a limited life,
while corporations have a potentially perpetual life. 6) Transfer of ownership. It is easier to transfer
ownership in a corporation through the sale of stock.
The biggest disadvantage is the potential cost, although the cost of forming a LLC can be relatively
small. There are also other potential costs, including more expansive record-keeping.
Forming a corporation has the same advantages as forming a LLC, but the costs are likely to be
As a small company, changing to a LLC is probably the most advantageous decision at the current
time. If the company grows, and Doc and Lyn are willing to sell more equity ownership, the
company can reorganize as a corporation at a later date. Additionally, forming a LLC is likely to be
less expensive than forming a corporation.
CASH FLOWS AND FINANCIAL
STATEMENTS AT SUNSET BOARDS
Below are the financial statements that you are asked to prepare.
The income statement for each year will look like this:
Cost of goods...