Home "Business" hobby due to COVID, need to create business or buy insurance?

[Leo]

My wife started a hobby of baking. A friend really liked it and so she was like "Hey, can you bake me this cake and I'll pay you $30". Next thing we know, friends of friends are now asking for "favor" or ordering. Some baked goods consist of custard, cream and sometimes meat.

I'm very pessimistic and I know that baked goods is very simple and it should be rare to see this kind of problem but I thought what if someone who we don't really know fraudulently sue us and claim that they got food poisoning or something. We have a decent net worth and I know one huge mistake could be a disaster. Does my wife needs to register her baking as business and maybe start LLC? Although we don't want to be so serious and pay for those fees. Does she need to buy any liability insurance?

I'm very noob on this topic so I appreciate any ideas or guidance. Thank you!

[QuarterMillionMan]

Anything pertaining to food selling needs to be regulated by the Health Department of your city/state. Liability would scare me to run in the opposite direction. Not worth it if it were me.

[kork13]

I'm only marginally familiar with how home baking works when it comes to legalities... But I've got a google-box, and this article from the Houston Chronicle (note: particular to Texas -- you need to check your state's regulations) generally confirms my very limited understanding. With custards, meats, etc., your wife probably only has 3 options: (1) get your home kitchen inspected and certified by the state (likely not gonna happen, unless you have an industrial kitchen in the basement); (2) rent a small space that DOES have an industrial kitchen & operate the business out of there; (3) graciously explain to customers that she isn't set up to do some of those things, and recommend a more pro-level friend/associate who might be willing to reciprocate in some way.

If it's predominantly just cookies, cakes, cupcakes, etc., you probably don't need to go to that degree of formalizing the business. But there's also nothing wrong with doing so -- registering as an LLC is cheap (~$100/yr? varies significantly by state), as is a basic liability policy. Really, that's probably the very furthest you need to go, but it's your/your wife's call to do whatever makes you both comfortable with the situation. If you do an LLC, so long as you keep the baking business (within the LLC) 100% separate from your household finances (besides a reasonable profit/income for your wife -- it helps to define a $ / % figure), the worst that could possibly happen is the business (LLC) is sued & she loses any assets WITHIN the LLC. Read up on how LLC's do (and don't) protect you, with emphasis on "parting the veil" -- be very careful never to do that.

[Leo]

Yeah, we don't really want to go extreme and she is not after the money, she likes to bake and she found something to do while staying at home 24.7. I just told her she might need to change it a little and remove all the meat, custard and cream and maybe just sell baked goods like cakes and cheese (velveeta) filled bread. That being said, should we still do LLC and stuff and buy insurance if she sticks to cakes, cupcakes?

[kork13]

Yeah, we don't really want to go extreme and she is not after the money, she likes to bake and she found something to do while staying at home 24.7. I just told her she might need to change it a little and remove all the meat, custard and cream and maybe just sell baked goods like cakes and cheese (velveeta) filled bread. That being said, should we still do LLC and stuff and buy insurance if she sticks to cakes, cupcakes?

With something so small, I would personally not bother with the insurance. You can (maybe should?) consult a lawyer (because I certainly am not one)... But in my personal opinion, I think an LLC (managed properly) would be sufficient to protect you. Protect the LLC, and only the assets within the LLC are subject to any possible liability -- that's the entire idea of an LLC.

I've actually considered at what point an LLC becomes appropriate, but haven't gotten any real resolution. Different circumstances (I'm looking at it from a real estate perspective), but that's probably a topic for a different thread.

[MonkeyMama]

An LLC becomes appropriate if you have assets you want to shelter and your state makes it worthwhile. I live in a state where a LLC is far too much red tape and expensive if you do not have significant business assets to shelter. (At least $1k per year, most of that being taxes). I generally never recommended LLC to my tax clients. Real estate is the only common exception I can think of.

In general, an umbrella liability insurance policy is more effective and cost pennies in comparison. These are the questions I'd ask your insurance carrier to make sure you are covered. Some sort of general liability insurance may be inexpensive and more useful for this particular situation. (& to clarify, maybe some sort of business/general policy in addition to personal umbrella insurance).

[MonkeyMama]

Protect the LLC, and only the assets within the LLC are subject to any possible liability -- that's the entire idea of an LLC.

I think a better way to word this is that only the assets in the LLC are protected.

If you have any assets whatsoever, you are always open to liability. If they can't get anything out of your LLC, your insurance is next in line, and then your personal assets. This is why insurance is such an important line of defense.

[mumof2]

I would have a form they can sign saying that after the food leaves the house you have no legal liabilities for it..they couldleave it in the car and go shopping etc that should cover her, it can say that they can't sue you etc

[disneysteve]

I would have a form they can sign saying that after the food leaves the house you have no legal liabilities for it..they couldleave it in the car and go shopping etc that should cover her, it can say that they can't sue you etc

That would accomplish nothing legally speaking. They could still sue you if they got sick after eating the food.

And would you buy food from someone who made you sign a waiver like that?

[Like2Plan]

I don't know from which state you are from, but as noted above the rules are guided by the state.
As an example:
CA passed a law about a year ago which relaxed some of the restrictions on The Homemade Food Operations Acts : https://www.npr.org/sections/thesalt...theres-a-catch
http://leginfo.legislature.ca.gov/fa...201720180AB626
This expanded the 2012 CA Homemade Food Act
https://www.cdph.ca.gov/Programs/CEH...perations.aspx

How to Start a Food Business in California With the Cottage Food Law

https://foodstarter.com/how-to-start-a-food-business-in-california-with-the-cottage-food-law/

I have a niece (from CA) who is investigating one of these options. She said she is required to have a separate refrigerator to keep the ingredients she will use for the cookies she will be making. She said there were many requirements to meet.

My MIL and BIL (from VT) used to have a homemade pie business which they sold at various Farmer's Markets. (This goes back several years because MIL passed away a couple of years ago) I remember MIL said if the sales reached a certain amount, they would have to have an inspection of their kitchen. It was a lot of work--and of course the profits were taxable income. (MIL sounded like she kept pretty good records). But, I think it was mostly a social outlet for MIL because she really enjoyed chatting with people.

[kork13]

I think a better way to word this is that only the assets in the LLC are protected.

If you have any assets whatsoever, you are always open to liability. If they can't get anything out of your LLC, your insurance is next in line, and then your personal assets. This is why insurance is such an important line of defense.

That seems completely the opposite of how I've always heard LLCs to function... My understanding is that the LLC forms a shell around the business that basically says "what happens in the business stays in the business." Rather, you're saying it's the other way around, where it protects the business from anything that happens outside of that LLC shell...? I've never thought of it from that perspective, but they really serve both functions, no? The idea is that the LLC is its own separate entity -- so what the LLC does won't impact anyone else, and what anyone else does won't impact the LLC.

[cypher1]

That seems completely the opposite of how I've always heard LLCs to function... My understanding is that the LLC forms a shell around the business that basically says "what happens in the business stays in the business." Rather, you're saying it's the other way around, where it protects the business from anything that happens outside of that LLC shell...? I've never thought of it from that perspective, but they really serve both functions, no? The idea is that the LLC is its own separate entity -- so what the LLC does won't impact anyone else, and what anyone else does won't impact the LLC.

I thought the same as the whole point of an LLC function. The idea if that if someone tries to sue your business, they can't go after your personal assets, since LLC is a separate entity. In other words to basically protect personal from professional (business) assets.

[Fishindude77]

I'd just keep it a small cash only business and only sell to friends and acquaintances.
If you do everything by the books to the letter of the law, every little kids streetside lemonade stand and roadside vegetable wagon would require permits, inspections, insurance, etc.

Just have fun with it.
If it turns into something serious with employees, etc., then you can start worrying about all of that other stuff.

[Leo]

I think it's really rare to get a food poisoning from baked goods and even if someone try to sue us, I think it's hard to prove and win, right? Plus, worst case, maybe this just goes to a small claims court and we can definitely pay few thousands of dollars.

I called my auto insurance carrier, Geico and they say umbrella insurance doesn't cover any business actions/lawsuit and they won't give me a quote for business owner/general liability insurance because the business is new and they require 1-2 years of operation.

If we want to check the LLC route, does that mean that we need to register a business in our county, file some paperwork, do the process of kitchen inspection etc, before we can apply for LLC? I know there are websites out there like RocketLawyer where you can apply LLC easily for few hundred bucks but don't we need to do anything else before that or sole proprietorship would be fine? All those fees are more than the revenue since I consider this more like a hobby lol

[MonkeyMama]

I thought the same as the whole point of an LLC function. The idea if that if someone tries to sue your business, they can't go after your personal assets, since LLC is a separate entity. In other words to basically protect personal from professional (business) assets.

It goes both ways. If someone sues you personally they can not go after your LLC.

Kork, consider me corrected. In practicality, never seen a LLC used as a line of defense to protect personal assets. Insurance is generally more useful and cost-effective. But this could be very state and situation dependent.