What are the costs to start and maintain a cake business?

Many bakers start out baking in their home kitchen. While this approach can be limiting, it significantly reduces start-up costs. Many home-based cake bakers report an initial investment as low as $1,000. Expect costs to include: $400-800 for a refrigerator. $50-400 for state licensing. Around $300-500 in maintenance costs Ongoing purchase of ingredients. Visit our How to Start a Cake Business guide to learn more about the costs of starting and maintaining this business.

Should I Start an LLC for My Cake Business?

Starting a limited liability company (LLC) for your cake 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 cake business, lawsuits can arise from things like selling a contaminated cake that causes customers to fall ill, using a trademarked cake style without a license, and defaulting on a business loan.

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

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

Do I Need an LLC for a Cake 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 Cake Business

By starting an LLC for your cake 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.

Cake businesses will benefit from liability protection because food and beverage businesses, including cake businesses, face the risk of product liability, trademark infringement, workplace accidents, and general business losses.

Example 1: You recreate a copyrighted design for a cake. A picture of this ends up on social media and the copyright holders sue your business. Being an LLC, your limited liability status keeps your personal assets out of the matter, only letting business assets be used for compensation.

Example 2: While baking an order, a fire breaks out in an oven and causes significant damage to your storefront and a neighboring one. They demand you pay for the fire damage. Limited liability from being an LLC keeps your assets as the owner separates from the business, meaning your personal assets can not be used to pay for the cost.

Example 3: When a customer comes in to pick up an order, they wander into the kitchen and burn themselves on a stovetop. The customer wants you to pay their medical bill for the burn and is considering taking you to court. Since your business is an LLC, limited liability protects your personal assets so only the business’s assets are subject to repayment and any settlements that may be reached.

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 Cake 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 cake 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

Cake 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).

Get Started

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 businesses need insurance to protect their business assets — even LLCs. This is because limited liability protection from being an LLC protects your personal assets, not your business assets.

Insurance can protect your employees, appliances, vehicles, etc. from damage, helping replace them should an accident or natural disaster take place.

Common Situations Business Insurance May Cover for a Cake Business

Example 1: During a tour of your cake-making facility, a potential business partner leans on an oven, sustains serious burns, and decides to sue your business. General liability insurance would pay for your legal defense and any required settlement.

Example 2: While visiting your place of business, a customer slips on a wet floor in the restroom, breaks a wrist, and demands you pay for her medical treatment. General liability insurance would cover her medical bills.

Example 3: A competitor files a lawsuit against your business, claiming your logo is too similar to her company logo. While you disagree with the claim, you want to hire a lawyer to protect your business. General liability insurance would cover your legal defense and any required settlement.

Other Types of Coverage Cake 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 cake companies should obtain.

Product Liability Insurance

While you put your heart and soul into your cakes and hope every customer will love them, there’s always a chance someone might claim your product caused them harm. In the event of a lawsuit, product liability insurance would cover your legal defense fees and any required settlement.

Commercial Property Insurance

You made a major investment to establish your cake business. If you own the building in which you operate, commercial property insurance would cover the cost of repairing or replacing your business-related property in the event of a fire, theft, or natural disaster. This includes structural damage to your building as well as the cooking equipment, ingredients, and other supplies you store there.

Workers' Compensation Insurance

If you have any employees, most states will require you to carry workers’ compensation insurance for both part-time and full-time workers. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover, but also any disability or death benefits stemming from a work-related accident.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

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.

Read our Business Insurance article for more info.

Many bakers start out baking in their home kitchen. While this approach can be limiting, it significantly reduces start-up costs. Many home-based cake bakers report an initial investment as low as $1,000.

Expect costs to include:

$400-800 for a refrigerator.
$50-400 for state licensing.
Around $300-500 in maintenance costs
Ongoing purchase of ingredients.

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

The ongoing expenses of running a cake business include operational costs, cake-making ingredients and supplies, marketing and advertising, and equipment maintenance. Cake businesses may also have to pay for the renewal of permits and licenses.

Learn more about running a cake business.

Cake businesses make money from the sale of their cakes. Some cake businesses also provide baking or decorating-related classes, either in person or online.

Learn more about starting a cake business.

A cake business offers an opportunity to realize a significant profit. Small-scale cake businesses report profits between $41,000 to over $65,000, and more established cake businesses that branch out report profits ranging from six figures to over a million.

Learn more about starting a cake business.