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Sole proprietorship, limited liability company, or corporation

Scenario #1:
Otis loves to bake cookies, and his friends suggest that he open a bake shop. After saving some money, Otis decides that he will start his own business. Otis is familiar with sole proprietorships, limited liability companies, and corporations, but he is unsure which option is best for his business.
Consider the scenario and answer the following question:
Should Otis select a sole proprietorship, limited liability company, or corporation?
Explain why the form of business organization you selected is best for Otis.
[Write roughly 1 page that fully answers the above question here.]

Scenario #2:
Otis hires Kelly to help in his new bake shop. Kelly enjoys the job, is always on time, and is happy with the hourly pay. One day, after Kelly mops the floor, Doug shows up to deliver a package. Doug slips on the wet floor and breaks his leg.
Consider the scenario and answer the following question:
• Is Otis responsible for Doug’s injury?
Explain the elements of an agency relationship in your response.

Scenario #3:
Otis is looking to expand his business. He has the opportunity to make sugar-free cookies using a new artificial sweetener. This sweetener is inexpensive and would increase Otis’s profit margin. However, there are some health concerns about the artificial sweetener, as studies show that it may cause cancer. Otis would like to increase his profits, but he is concerned about the health risks of using the artificial sweetener.
Consider the scenario and answer the following question:
• Should Otis use the artificial sweetener?
Discuss both the financial and ethical implications of Otis’s decision.

Sample Answer

Out of the three options, a Limited Liability Company (LLC) is the most suitable business structure for Otis’s bake shop. Here’s why:

Sole Proprietorship: This is the simplest structure but offers no liability protection. If Otis gets sued or the business incurs debt, his personal assets (car, house) are at risk. Since Otis is starting a new venture, unexpected situations could arise, and limited liability is crucial.
Corporation: This offers the most liability protection but comes with complex formalities. Setting up and maintaining a corporation involves legal fees, board meetings, and additional administrative burdens. For a small business like Otis’s bake shop, the complexity might outweigh the benefits.

Full Answer Section

Limited Liability Company (LLC): An LLC provides a good balance between simplicity and liability protection. It’s easier and less expensive to set up compared to a corporation. More importantly, LLCs shield Otis’s personal assets from business liabilities. Profits and losses pass through to Otis’s personal tax return, avoiding double taxation (corporate tax and personal income tax) that corporations face.

Additional Considerations for Otis:

Number of Owners: If Otis plans to bring in partners later, an LLC is still a good choice as it can accommodate multiple owners.
Growth Potential: If Otis envisions significant growth, an LLC can easily convert to a corporation later.

In conclusion, considering the ease of formation, liability protection, and tax benefits, an LLC is the most fitting structure for Otis’s bake shop at this stage.

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Sole proprietorship, limited liability company, or corporation

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