Last Updated: May 10, 2024, 12:09 pm by TRUiC Team

Should I Start an LLC for My Bakery?

Starting a limited liability company (LLC) for your bakery 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 bakery business, lawsuits can arise from things like food poisoning allegations as well as from a variety of other customer and employee injuries. 

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

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

Do I Need an LLC for a Bakery?

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 Bakery

By starting an LLC for your bakery, 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.

Bakeries will benefit from liability protection because food and beverage businesses, including bakeries, face the risk of product liability, injuries, and other market risks. 

Example 1: After taking on a large business loan to purchase new equipment for your commercial kitchen, you begin to worry that you may struggle to pay the loan back in the future. Since you are registered as an LLC and did not personally guarantee the loan, you realize that your personal assets will remain protected no matter what. 

Example 2: When one of your main chefs is slicing a cake, another member of staff accidentally bumps into him, resulting in a cut wound. Since the chef had warned you repeatedly that the kitchen is overstaffed and such an accident is bound to happen, he sues you for breaching your duty of care and demands that he is compensated for his medical expenses and loss of income. The limited liability offered by an LLC will ensure that you cannot be held personally liable in such a case. 

Example 3: One of your employees slips down and hits their head on your commercial kitchen sink. This leads to a relatively serious concussion, leaving them unable to work for the rest of the week. When they find out you haven’t offered to compensate them for their injury, they threaten to file a lawsuit against your LLC in order to seek medical damages. Here, your LLC’s structure will protect your personal assets from being put in jeopardy, regardless of how the lawsuit progresses.  

Example 4: A client with a nut allergy has a severe allergic reaction after eating one of your pies due to cross contamination. They sue your business to cover their hospital bill.

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 Bakery

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 bakery 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

Bakeries 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 loansgrants, and credit.

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

How to Form an LLC

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

  • You can hire a professional 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?

All LLCs, especially food-related businesses like bakeries, need business insurance. Even though the owners of LLCs benefit from limited liability in law, this does not apply to the business’s assets (e.g., storefront, company equipment, etc.). 

Note: If you decide to hire employees, you will be legally required to purchase workers’ compensation insurance.

Common Situations Business Insurance May Cover for a Bakery

Example 1: A visitor to your bakery is taking a tour when she stumbles and catches herself in a hot oven. The burns she sustains require medical care. She demands that your business pays for that medical care. You can likely get financial assistance from your general liability insurance policy to pay for her treatment.

Example 2: One of your bakers writes a blog about her experiences. In one of her recent blogs, she talks about why your bakery is better than a competitor’s bakery. The competitor sees the blog and decides to sue your business for libel. Your general liability insurance will pay for your legal defense against accusations of libel, including the cost of a settlement if one is required.

Example 3: A customer is leaving your store. She swings the door open to leave, steps into the doorway, and then stops to check her phone. The door swings back and hits her, knocking her to the ground and causing her to break her wrist. She sues your company for damages. Your general liability insurance will pay for your legal defense.

Other Types of Coverage Bakeries 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 bakeries should obtain: 

Commercial Property Insurance

All of your ovens, other equipment, and supplies for baking took a considerable investment to acquire. If you were to lose most or all of your property in an unexpected event like a fire, it would be expensive to pay for replacements. With a commercial property insurance policy, you can get financial help to pay for repairing or replacing the property that is lost in a covered event.

Product Liability Insurance

You bake your goods with care, but there is always the possibility that someone will claim that something you sold caused them injury or illness. If you have product liability insurance, your policy will pay for your legal expenses if a customer sues you for damages caused by one of your products.

Commercial Auto Insurance

If you have a vehicle that you use primarily for business, you need a commercial auto policy to protect your vehicle, those that drive the vehicle, and your business. Your state likely requires you to have a commercial auto insurance policy. With such a policy, you have coverage if your vehicle is involved in an accident, both for property damage and for medical care to treat injuries.

Workers’ Compensation Insurance

Your state most likely requires you to carry workers’ compensation insurance if you have employees. Your policy will pay for medical treatment for employees injured performing work-related duties. It will also help to pay their lost wages while they recover from their injuries.

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, commercial property insurance, workers’ compensation insurance if you have employees, and possibly home-based business insurance.

Read our Business Insurance for Bakeries article for more info.

The cost of starting a bakery will depend on your location, quality of ingredients, and size. You will also likely need to purchase a business website. 

Your ongoing costs will include utilities and rent, employees’ salaries, raw ingredients, and business insurance.

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

Much like the startup costs, your ongoing expenses will depend on how much of an investment you make in your building, employees, and materials. Additionally, your marketing expenses and raw ingredients will be a variable expense.

Learn more about running a bakery.

How much your bakery will make depends on the expenses you incur and your volume of sales. Additionally, the profit margin you have on drinks or other items sold can help drive up what your bakery is able to earn.

Learn more about starting a bakery.

Bakery businesses offer some flexibility in how they are operated. Some are set up as a storefront, others operate out of a commercial kitchen, and some even out of a home. 

Bakeries can make anywhere between $30,000 and $60,000 in annual profit. The varying options give flexibility in the overhead you take on and leave room for greater profit margins.

Related Articles

Article Sources

IRS: Limited Liability Company

IRS: S Corporations


SBA: Small Business Guide

SBA: Choose a Business Structure Guide

US Census Bureau: Small Business Statistics

SBA Office of Advocacy: Data on Small Business

FRED: SBA Data for Small Business