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

[disneysteve]

Kork, consider me corrected. In practicality, never seen a LLC used as a line of defense to protect personal assets.

I'm not a lawyer or accountant but my understanding is that that is exactly the purpose of an LLC - to protect your personal assets.

[kork13]

I'm not a lawyer or accountant but my understanding is that that is exactly the purpose of an LLC - to protect your personal assets.

I can actually see MM's perspective, especially given that she works for a home builder.

In the real estate world, LLCs could be valuable from a business perspective to segment off groups of related projects. If one of those project groups had a liability issue come up, the other LLCs are insulated & protected from the one that's in trouble. It's a different perspective from what some of us are familiar with, but still entirely valid.

Honestly, I've just never thought of them functioning laterally (or in reverse) that way.

[MonkeyMama]

Thanks Kork. I was commenting more from my 20 years working in tax. In my state, if you form a single member LLC on legal zoom or whatever, your personal assets are not necessarily going to be protected. We took the idea a little more seriously when it came to asset protection with putting the assets into a LLC. & I think real estate is just an entirely different beast. In all cases: Hire a lawyer and do it right.

I will tell you that my very wealthy employer does not own a single LLC that I am aware of. Which goes in line with all my prior tax experience. But like I said before, I know this is somewhat state specific. This doesn't mean that LLCs can't provide more value in other states.

OP, sorry for the side track.

[~bs]

Once you go commercial. and food products, you're opening yourself to a whole world of hurt if something goes wrong. Every state probably different, but in mine, you MUST operate out of a commercial kitchen and be licensed and subject to inspection. As a business, you should be insured. if you do not operate as a business, you're directly and personally liable.

[~bs]

I'm not a lawyer or accountant but my understanding is that that is exactly the purpose of an LLC - to protect your personal assets.

The "limited" pertains to limited partners or investors only. If you're an general partner/operator of the business, the corporate veil will be pierced and you will be personally liable. Protecting yourself from lawsuits relating to negligence or mistakes is what insurance and maintaining best practices for your industry is for. If hiding behind a business structure to relieve themselves of professional responsibility was a thing, everyone would be doing it, doctors, lawyers, etc etc.

In the real estate world, LLCs could be valuable from a business perspective to segment off groups of related projects.

It works well in real estate development and such to segment off individual projects, because if the project goes upside down, you dont want all the investors tied up in lawsuits and potentially liable for more than they invested.

[~bs]

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

The scope of the lawsuit would depend on what the other party is claiming. Did they end up in the hospital for a week? Did they die? Small claims assumes they had sore tummy and went to the ER and was all better the next day.

You need business insurance. The insurance company doesn't want to cover you. That should tell you something about the risk.

If you have assets at risk, I would not go "cash only", as that's likely even WORSE if something happens because you're willfully evading the law, taxes, regulations, etc, that caused someone injury and death. If you followed all the rules and something happens, I'd guess your potential liability would be smaller, not bigger.

I discussed LLCs in an earlier comment, it will not protect you. If your friend invested $100,000 in your business, it would protect him from losing more than $100,000, not you and your wife.

Strongly recommend you consult with professional PAID help. I SMH at dummies that try to get away with things cheap, then get burned in the end. For example, in my state, distributions on 401k/profit sharing can be treated differently than federal 1099. But the form will not disclose that. So you have all these dummies filing with turbotax overpaying tens of thousands of dollars on state taxes, yet they "saved money" doing it themselvs. Penny wise, pound foolish. Just like people that think they know better than doctors and choose to self remedy instead. Everyone's opinion on the internet is likely worth exactly what you paid for it. My dos pesos.

[mumof2]

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?

If you want it yes...even in our restaurants here you are not allowed to take your leftovers home from a restaurant for that reason...once it leaves you don't know what happens to it...I just wouldn't bother with it and just explain why

[disneysteve]

even in our restaurants here you are not allowed to take your leftovers home from a restaurant for that reason

Really? I've never heard that. I'm guessing, though, that serving sizes are more appropriate there. Here in the US, the world capital of obesity, restaurant serving sizes are insane. It is not uncommon for me to get 3 meals out of a restaurant entree. It would be a huge waste if we couldn't bring that stuff home to eat another day.

What about something like a pizza? Can you not order a pizza, each have a couple of slices, and take home the rest? I would hate that.

[mumof2]

What about something like a pizza? Can you not order a pizza, each have a couple of slices, and take home the rest? I would hate that.

Yes we get a much smaller amount of food here when served...if you order a pizza then order it to your house..but no you can't take it home...not in our state anyways...you can order takeaway but not eat in and take the rest home...but if you notice people over here don't sue people as much either...so they restrict it by doing things like this

[~bs]

If you want it yes...even in our restaurants here you are not allowed to take your leftovers home from a restaurant for that reason...once it leaves you don't know what happens to it...I just wouldn't bother with it and just explain why

Many hotels that do weddings and conferences have the same policy. They'd rather dump the food instead of risk liability for food taken home and someone gotten sick afterwards. My company has paid for dinner events with hundreds of employees, and this is the exact reason given by hotel reps. I actually imagine that this may be a requirement of their insurance policy. It's one thing if a restaurant accidentally sickens 10 people with bad food in a night, now imagine you get hundreds or thousands of people hospitalized.

[MollyClarkson]

Hey, if your wife likes it, why not? If she wants to bake cakes to order, don't stop her. I want to tell you a story that surprised me. A couple of years ago, my friend decided to start making handmade jewelry. I didn't understand why she was doing this, because I don't think it's a particularly lucrative job. Especially since our city is full of such stores. After that meeting, we did not see each other for a long time and did not communicate, and just a couple of weeks ago I saw her services on the list of promotions in San Diego. This site features the best businesses in San Diego. I was very surprised when I saw her jewelry on this site. Of course, I called her later and congratulated her. So don't underestimate your wife.

[bjl584]

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!

Setting up an LLC is inexpensive and easy.
Totally worth doing if you want to pursue this.
There are a few health codes that you will most likely have to research and adhere to.
A conversation with an attorney might be worth it.
Beyond that, I'd plow ahead. Don't be discouraged or afraid.
Once your ducks are in a row, go after it!

[amarowsky]

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.

I'd say check into your Cottage food laws. Depending on your state (if they lean more freedom or safety) you'd be surprised what you can get away with for your first few thousands. Michigan has more lax cottage industry laws (from what I can tell, it's def true compared to the coasts).

You can get creative in some places depending on whats around you. Maybe a workshop around you (I know there are some around me). Maybe there is a commercial kitchen that you can pay to "join" and cook from that has already established the required serv safe laws + proper appliances for your area (or that may be another interesting opportunity to serve other people who want to manufacture food for sale at market). Or consider buying an already approved food truck (don't even have to drive it around if you don't want to).

Did a quick review of the Michigan Cottage food law, our's is essentially ok to sell at farmers markets, direct markets, or roadside stands as long as it is "non hazardous foods, don't require temp for preparation, and sales are essentially under $25,000 per year". So from what I can read, Bread would be OK (as it has no hazardous ingredients fundamentally, but a cake "may" be hazardous because it has eggs in it?" Also delves into acidic foods and/or fermented/pickled stuff. They definitely limit what you can try to make for sale. But it's a good starting point to consider.