Should I Start an LLC for My Chocolate Business?

Starting a limited liability company (LLC) for your chocolate business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a chocolate business, lawsuits can arise from things like a customer claiming that they got ill after eating your chocolate or accruing debt as a result of not paying your lease on time.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your chocolate business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Chocolate Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Chocolate Business

By starting an LLC for your chocolate business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Chocolate businesses will benefit from liability protection because of the risk of being sued for personal injuries suffered by your customers, as well as other general business risks.

Example 1: The landlord of your chocolate business premises renews the lease. The rent is less than before. You accept for your LLC. The landlord later claims there was a typo, and demands a higher rental, which you refuse to pay. He sues. Whatever the judgment, rest assured your personal assets are not at risk. The rent obligation is the LLC’s, not yours.

Example 2: On behalf of your LLC, you offer to lease new premises for five years; the landlord accepts. Your old landlord offers better terms and you decide to stay. The new landlord sues to enforce the oral agreement. You counter that to be enforceable, a five-year lease should be in writing. Even if the suit succeeds, your personal assets are shielded from judgment.

Example 3: Your chocolate business LLC becomes balance-sheet insolvent and creditors press for payment. Since your liability is limited to the amount you have invested in the business, the creditors cannot touch your personal assets. Your personal assets are protected because you have formed an LLC to operate your chocolate business.

Example 4: While you're giving a demonstration on hand-dipped chocolates, an excited child sticks his hand into the chocolate tempering machine, burning his forearm in the process. The child’s parents sue your business for the medical expenses.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Chocolate Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a chocolate business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Chocolate businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

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How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a trusted LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Yes, all businesses need insurance because of the multitude of risks they encounter. Chocolate businesses need liability insurance to protect against property damage and personal injury. General liability insurance will also cover legal costs, medical bills, and copyright infringements.

LLCs protect personal assets. Business insurance protects business assets.

Common Situations Business Insurance May Cover for a Chocolate Business

Example 1: While you're giving a demonstration on hand-dipped chocolates, an excited child breaks free from his parents' grasp and sticks his hand into the chocolate tempering machine. He badly burns his forearm and breaks one of his fingers in the process. His parents are angry that the area wasn’t sectioned off properly and threaten to sue you for damages. General liability coverage will likely pay for his medical bills and any resulting legal fees.

Example 2: Your cleaning crew has just finished mopping the floor in the restrooms when a customer slips and falls. There was no wet floor sign put down at that moment, and you know you could be found responsible for their injuries. With general liability insurance, you can cover their medical costs and any potential settlement.

Example 3: During a tour of your facility, someone trips over an extension cord in the office area and falls into a large shelving unit, sustaining serious injuries. General liability insurance will likely cover their medical bills and your legal fees if a lawsuit results from the accident.

Other Types of Coverage Chocolate Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all chocolate companies should obtain.

Workers’ Compensation Insurance

Most states require that business with part-time and/or full-time employees must carry workers’ compensation insurance. This insurance policy helps to cover medical costs if any of your employees become injured while on the job. Additionally, if they are unable to return to work for a period of time, your policy will provide disability benefits.

Product Liability Insurance

Any time that you create a product that will be consumed by the general public, you need to protect your business from the threat of a lawsuit. If a customer falls ill after ingesting one of your products or somehow sustains a serious injury, you could be sued for damages. With product liability coverage you can rest easy knowing your business will be protected in these types of situations.

Commercial Auto Insurance

Making deliveries may be an important part of your daily business operations. And whether or not you use a designated delivery truck or you rely on personal vehicles, you need to invest in a commercial auto insurance policy for maximum protection. Your personal car insurance will not cover your personal vehicle while you’re performing work duties.

Commercial Umbrella Insurance

It is possible for an accident or lawsuit to use up all of the available funds provided by your primary insurance policy limits. If this happens and you don’t have additional coverage, you could be left to pay the remaining expense on your own. Commercial umbrella insurance goes beyond your primary insurance limits to provide the funds you need to keep your business operating smoothly.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance. You may also need workers' compensation insurance and product liability insurance.

Read our Chocolate Business Insurance article for more info.

Getting a chocolate business up and running will cost $5,000–$10,000. Startup costs will include the purchase of manufacturing equipment and storage facilities. Your chief operating costs will be rent, utilities, marketing, salaries, and commercial insurance.

Visit our How to Start a Chocolate Business guide to learn more about the costs of starting and maintaining this business.

Marketing, purchasing ingredients, and kitchen maintenance will constitute the bulk of your regular expenses. You will also have to pay employees’ salaries.

Learn more about running a chocolate business.

If you are selling fine chocolate, you will charge your customers a premium. Selling lower-quality chocolate will require more sales volume to generate the same amount of money.

Learn more about starting a chocolate business.

Profit margins for chocolate businesses vary widely, from 8% to 10% for a large-volume company to 55% to 75% for a boutique chocolatier. To boost your profits, you could run a franchise and sell chocolate made elsewhere.

Learn more about starting a chocolate business.