Ashers Baking Company, based in County Antrim, declined a customer's request for a cake with a pro-gay-marriage slogan back in May.
It was ordered by gay activists in Belfast to celebrate 'International Day Against Homophobia and Transphobia'.
The company said it refused the request because it was "at odds" with its Christian beliefs.
General Manager, Daniel McArthur said his company was taking "a stand" and argued that marriage in Northern Ireland "still is defined as being a union between one man and one woman".
The company received a letter in July from the Equality Commission, warning that it could face a sexual orientation discrimination case.
In a statement the watchdog has confirmed it will begin legal proceedings, unless the firm acknowledges a breach in equality laws.
It also says it is supporting the claimant's pursuit of damages for the "upset and inconvenience caused", but added that these would only be "modest".
The bakery says it feels the Equality Commission is pursuing them because of its Christian beliefs "that marriage is between a man and a woman".
The company's lawyers have now replied to the watchdog's letter, "stating that their view remains unchanged, that their clients have not acted unlawfully".
Northern Ireland's Evangelical Alliance has claimed that religious freedom is in jeopardy over the Equality Commission's plans to sue a Christian bakery.
Speaking on Premier's News Hour NI director of EA Peter Lynas said: "They're saying that this is both religious and political discrimination, and we're really worried this is about privatising religion and saying there's no place for religion in the work place or in the public square; and that gay marriage and views about that are political opinions that can also be censored."
The Commission argues the case "raises issues of public importance regarding the extent to which suppliers of goods and services can refuse service on grounds of sexual orientation, religious belief and political opinion".
It added that any decision as to whether or not discrimination has occurred would be a matter for a court.
Peter Lynas, Evangelical Alliance: