How to have a Legal Home-Based Cake Business

Today I want to give you a little information on how to have a legal home-based cake business in the United States.  I know, I know.  This is not the fun stuff.  Most of us started a "cake business" because we love cake.  But just loving cake makes it a hobby.  If you want to earn money from it and have a legitimate business, you have to follow the laws.

I don't have information for other countries except the UK and Australia.  Skip all the way to the very end of this post for information there that might help you if you live in Australia or the UK!

I decided to write this after a recent comment on this post (my post on how to charge for cakes), asking this,

How did you go about getting your tax ID, and business license, and deal with all the state/city inspections. A friend and I want to start a legit business out here in xx, but we just have NO IDEA how to really start the process.

Let me start with... I am not a lawyer, business advisor, accountant, or any other kind of fancy professional.  I'm giving you my un-certified, non-legally-binding, advice.

I'm also going to basically give you information based on my experience.  This will vary based on your location.  I'll also try to include what I paid for these services to give you an idea of the cost.

Shameless plug: I do offer coaching and an opportunity to speak to me in person here.   Again, I won't be offering any legal advice, but you can pick my brain about anything cake or blog related and I'll help you out!

Okay... back to the subject at hand.

How to have a Legal Home-Based Cake Business

First off, not everyone can have a Legal Home-Based Cake Business.   I'm not 100% this information is up-to-date, but from my research, the following states do not allow food to be sold that was prepared in a home: Connecticut, Hawaii, Idaho, New Jersey, West Virginia, and Washington DC.  (please feel free to correct me in the comments)

For everyone else, let's talk about how you can get legal.

There are four people/organizations I'd recommend that you contact if you want to have a legal business, in no particular order.

The Small Business Administration

The Small Business Administration (SBA) offers free counseling for anyone wanting to start a small business.  I found their advice extremely helpful when I set up my LLC.  All I had to do was call to find the office closest to me and they were able to set me up an appointment very quickly. This is always where I recommend people go first to start setting up a legal business.

The small business counselor I met with is actually who told me about the other calls/contacts I needed to make to set up legally under our federal government (for tax purposes) and our state laws (for taxes, sales taxes, local permits, health department, etc.).  You can click here to find an office.

An Accountant

On the advice of the SBA counselor, I had a CPA (certified public accountant) help me decide which type of businesses I wanted to establish.

Most people start as a sole proprietor or an LLC (limited liability corporation).  She also helped me file for a federal tax ID, apply for a sales tax permit, and register as a business with my state.  For the record, I started as a single-member LLC.

There was a small fee to apply for my federal tax ID (EIN) - I think it was $50.

There are sales taxes charged in Mississippi (that I'm required to collect and submit to the state monthly) so I had to apply for a sales tax permit and the state revenue office requires that businesses be "bonded" for that.  This cost me $500.

There was a much cheaper alternative to buy bond insurance but this would have been an annual fee.   Because I planned to be in business for the long haul, I decided to bite the bullet and pay the full fee upfront vs. buying annual insurance.

The accountant also advised that I go to my local courthouse to apply for a business permit ($25).  Again, these laws, fees, and requirements will vary by state and county.

Free consultation?

The accountant I initially contacted offered the first hour as a free consultation (in an effort to win my future business).  She did everything I needed in under an hour and I didn't have to pay her anything for her services.  This is not true for all accountants.  If money is tight, you might shop around to see if you can find a free consultation.

If you cannot find a free consultation, be sure to ask what their hourly rates are before going for an appointment.  You don't want to get to the end of a 2-hour meeting to find out you owe money you don't have!

I did not end up choosing the firm to help with my business long-term (their hourly rate was extremely high - I think it was $200/hr.).  After calling around, it seems most (in my area) charge an average of $50 per hour so I chose one closer to that price.

As I mentioned earlier, I started as an LLC.  But in 2017 I converted my business to an S-corporation.  That's because, with my significant income increase on my blog in 2016 (you can see my income increase over the 6 years of my blog in a chart in this post), we had to pay over $10,000 in taxes at the end of that tax year. Ouch!

I haven't filed for 2017 yet, but in theory that change will save me a lot of money in taxes.  Crossing my fingers...

Either way, an accountant should definitely be able to advise you on what's the best business set-up for your situation.

A Lawyer

In Mississippi, even if an LLC is registered with the state and has all of the above things set up and ready to go, it's still not "legal" until it has an Operating Agreement.  You can find generic ones online, but I chose to go to an attorney and have mine drawn up.

The Operating Agreement for a single-member LLC was very simple and less than $100.   A lawyer might also be able to advise you in other aspects of your business but I only used him for my Operating Agreement.

Your Local Health Department

Aside from all of the legal hoops to jump through, you also have to consider the health department.  This may not be the case for all states, but in most states, your local health department is who would do inspections, issue food permits, etc.  In Mississippi (where I live) the Cottage Food Law actually doesn't require any licenses or inspections for home bakers.  But that is not the case for every state and you need to know your laws.

There might be restrictions on what you can sell, what ingredients you can use (or not use), the equipment you might need, labeling your products, and even how much money you can earn. You may have to pass inspections, get certifications, etc.

Visit Forrager.com for an overview of your state's laws.  Click on your state for more detailed information.  You can also visit Pick Your Own to find more detailed information for each state.

And that's it.  Those are the four primary places/contacts I made to set up a Legal Home-Based Cake Business both in Mississippi and with the federal government.  I'd highly recommend that anyone running (or hoping to run) a home-based cake business in the US do their best to do so legally.

As I mentioned in the beginning, this advice only applies to US readers.

But if you happen to be in Australia, I'd highly recommend this post from my friend Rebekah at Angelfoods.net.   If you sign up for any of her paid courses (which I recommend), I'd love for you to tell her Rose sent you!

And if you happen to be in the UK, Suzi at Pretty Witty Cakes has a whole section of business video tutorials in her membership.  I'm a lifetime member there and I'm certain you will get all the help you need if you sign up with her.