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Ask About Starting an Online Food Business

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By Catherine Gordon, JD | September 18, 2012

Dear Toolkit,

I want to start an online business selling cupcakes. For now, I will be baking the cupcakes in a rented kitchen. The orders will be placed online, and I will deliver the cupcakes on the date specified in the order. I plan to file a fictitious owner certificate and obtain a business license but I'd like to know if there is any other paperwork I should be completing?

Thanks,

Bursting To Bake

Dear Bursting,

Starting any businesses involves numerous paperwork responsibilities. Starting a business in which you prepare food sold to the public requires you to take additional steps to protect your business, yourself, and your customers regarding liability and safety concerns. Let's begin with the form of organization in which you choose to operate your startup and proceed from there.

You mention that you have filed a fictitious name certificate, or “doing business as” (DBA) paperwork. However, you do not specify if you have filed the proper paperwork to incorporate your business or operate in another form that would protect you from personal liability.

Filing a DBA makes it possible to conduct business under a name other than the owner’s or business entity’s name, but for sole proprietorships (and general partnerships), filing a DBA does not provide personal asset protection to the owner. For this reason, you should consider incorporating your business to protect your personal assets from the debts and liabilities of your new business. Please see our articles for in-depth information on the benefits of incorporating or, as another alternative, forming a limited liability company.

You may be thinking that you have enough paperwork to deal with and decisions to make when starting a business, so why complicate matters by adding corporate filings to the mix? Well, first know that the paperwork involved for incorporation is rather straightforward. And with the help of very reasonably priced professional services specially geared to serve the small business market, incorporating can be almost effortless.

More importantly, taking a few simple steps now to set up your business in the proper form can save you from huge headaches in the future. The risks involved in operating a business in a form that leaves you personally open to liability cannot be overstated. Taking action now gets you off on the right foot from the start and allows you to concentrate on making your startup a success!

You will also need to obtain a federal tax identification number (in order to file and pay federal taxes) for your business. For sole proprietors, this number can be the owner’s Social Security number.

Some states require companies to have a state tax identification number in addition to the federal one. Also, you might be required to obtain a seller’s permit if the products you sell are subject to sales tax. This information is available from your state and local taxing authorities.

You also specify that you will be renting a kitchen to run your business from, which means that you in all likelihood will have a lease agreement. Peruse our article regarding leasing agreements if you need more information regarding this important document. Of course, you should make certain that the lease allows commercial use of the premises. In addition, be sure that local zoning or health department laws do not prevent the kitchen from being used for commercial purposes or, better yet, that the facility is zoned specifically for commercial use.

Due to the complexity of the issues involved, we strongly advise that you consult an attorney before you enter into a lease contract.

As you indicated, you should obtain a business license for your startup. And because you are preparing and selling a food product, it is almost certain that the health department must inspect and/or approve of the premises. Check with state and local zoning and government authorities to be certain that you have any health department certificates or permits you need to open your doors. Industry groups and state and local government websites can be of great assistance in assisting you with these matters.

Finally, obtaining the right insurance for your business and enough of it can be overlooked when you’re starting out. Here are some points to consider:

  • Even though you are renting the kitchen, you must determine what your landlord is insured for and what you need to insure. For example, if a fire occurs, will any of your baking equipment such as mixers, etc. be covered by the leaseholder’s policy? You may need renters/content insurance if this is not the case.
  • Your business involves the creation of a food product. You should have some sort of product liability insurance in case a customer becomes ill from consuming your product. You could be one spoiled ingredient away from numerous claims filed against you.
  • If your cupcakes are ordered exclusively online, you don’t have to worry about insurance protecting your business from claims by customers injured where the goods are baked. However, assuming that the cupcakes are delivered by driving the online orders to customers, you do have a couple of insurance issues to contend with. If you use your personal vehicle to deliver your orders, you should inform your insurer that the vehicle will be used for business part-time. This may result in higher rates, but you don’t want a claim to be rejected because the insurance policy excludes business use. And if you hire delivery people you may be legally responsible for their actions in the course of business. You will want to have a conversation with your insurer to make sure you’re covered for any liabilities on their part.
  • Business continuity insurance is another protection you may want to consider. This type of insurance may not be a necessity when you’re just starting out. However, once your business is up and running, if you and your family are dependent on your income, you’ll want to insure that it is uninterrupted if you and/or your business are out-of-commission.

For more information about meeting your insurance needs, you'll want to consult our series of articles on this topic.

We hope this information is helpful, and we wish you success in your startup venture.

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