Should I Start an LLC for My Cupcake Business?

Starting a limited liability company (LLC) for your cupcake 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 cupcake business, lawsuits can arise from things like a customer claiming they got ill after consuming your store’s cupcakes or a delivery driver getting into a car crash while carrying out a delivery.

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

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

Do I Need an LLC for a Cupcake 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 Cupcake Business

By starting an LLC for your cupcake 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.

Cupcake businesses will benefit from liability protection because food and beverage businesses face a variety of risks like personal injury, product liability, and even property damage.

Example 1: A customer slips and falls due to a slippery floor on your business premises, which results in a severe injury. She blames you for being careless and sued for damages. If the law court finds you guilty and levies a fine, liability protection secures your private finances and ensures you do not pay through them.

Example 2: Your worker had a severe accident on his way for delivery. He claimed you did not adequately maintain the company's vehicle and filed a lawsuit against you, demanding compensation. If your cupcake business is registered as an LLC, your private assets will not be affected by the lawsuit.

Example 3: Your cupcake business suffered some setbacks, and you could not repay your business loan. As long as you registered your business as an LLC and guaranteed the loan through your business, liability protection will prevent your creditors from accessing your private finances in the course of getting back their money.

Example 4: A customer sues your business, claiming you did not properly inform them of the ingredients in a cupcake order, causing them a severe allergic reaction.

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 Cupcake 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 cupcake 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

Cupcake 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 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 commercial assets also need protection against loss or damage. Cupcake businesses need insurance for protection against property damages, accidents, and other factors that can negatively affect the growth of your business. LLCs protect only your personal assets; business insurance protects commercial assets.

Common Situations Business Insurance May Cover for a Cupcake Business

Example 1: During a tour of your bakery, one potential investor falls behind to look at your decorating station. As they hurry to catch up with the group, they walk into a hot oven door and burn their arm. Their injuries require a hospital visit and extensive treatment. General liability coverage would cover their medical costs and any damages if they decide to sue.

Example 2: A customer comes into your bakery and slips on a wet floor. During the resulting fall, they break their wrist and hit their head. If the customer sues for damages, general liability insurance would cover your legal costs and any payouts awarded in the lawsuit.

Example 3: As a delivery driver backs into your loading dock, the overhead door malfunctions and slams down on the delivery van. The driver is uninjured, but the van is badly damaged and unsafe to drive. General liability insurance would cover the vehicle repair costs and any damages associated with a resulting lawsuit.

Other Types of Coverage Cupcake 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 cupcake bakers should obtain:

Product Liability Insurance

While you stand behind every cupcake you sell, there’s always a chance a customer could become ill from eating one of your cupcakes or experience another issue with your product. This insurance would cover damages related to any of the baked goods you sell as well as your legal fees if a customer decides to sue.

Workers’ Compensation Coverage

Most states require businesses to carry workers’ compensation insurance for their part-time and full-time employees. 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 benefits stemming from a work-related accident.

Commercial Umbrella Coverage

A comprehensive business insurance policy protects your bakery from common operational risks. However, some situations may exhaust your primary policy limits and leave you to pay the excess legal fees and damages out-of-pocket. Commercial umbrella insurance provides peace of mind with protection beyond your primary policy limits.

Business Interruption Insurance

Closing your doors for repairs after an accident can seriously hurt your business. If a fire breaks out at your bakery or severe weather damages your storefront, business interruption insurance would cover some of your financial losses until you can reopen.

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 and commercial property insurance.

Read our Business Insurance for Bakeries article for more info.

The cost of starting a cupcake business depends on whether you plan to offer home-based delivery or a full-blown storefront. Whatever the case, a standard cupcake business can be established with an initial investment of $50,000 to $300,000.

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

The main ongoing costs will include buying additional ingredients, packaging for baked goods, and marketing to spread the word about your business.

Learn more about running a cupcake business.

Profit is made through the sale of cupcakes to customers. In the same way that doughnut shops offer special rates for multiple purchases, cupcake businesses may do the same.

Learn more about starting a cupcake business.

Cupcake businesses provide cupcakes and other desserts to customers. While some businesses may have a brick-and-mortar bakery that customers can visit, others may do cupcake delivery or catering at large events such as weddings and parties.

While there is a high potential for multimillion-dollar profits for franchised cupcake businesses, the average cupcake business profits around $35,000 to $50,000 on a yearly basis.

Learn more about starting a cupcake business.