Hi everyone,

I am still trying to sift my way through all the steps in becoming legal. I am going to use my brother in laws daycare's licensed kitchen for rent free-he's a sweetheart :)...So on the side of licenses, I need to get the kitchen inspected under my name for $50. I also need a Food Service Permit which is $100. I already have my Food Handlers card and ServSafe card. So, I am almost complete with this side.

The part I am unsure about is the business/taxes side. I am in the process of registering as a Sole Proprietor with my Secretary of State. I am also going to get a $2 million liability insurance policy through Flip Program. I have taken accounting classes (I am getting my Bachelor's in BA with a minor in Entrepreneur Studies...so I have a little background with this). I have read that as a Sole Prop, I can use my SS # instead of getting a FEIN. Also, will I file my business taxes with my personal taxes? I believe it is a Schedule C form.

In my state, baked goods are non taxable so I don't have to worry about sales tax. I understand the taxes I do need to pay are Self Employment taxes-Social Security & Medicare. So basically, if I understand correctly, when tax time rolls around-I need to submit my income from the business, deductions, and calculate any taxes I need to pay out. I'm almost certain I will probably be a loss my first year, but hey, we gotta start somewhere!

I'm just trying to get all this straight before I go down to the health dept. and pay the money for the inspection. Do I need to finish registering my business as a Sole Prop before I get the kitchen inspected and apply for a Food Service Permit? Or vice versa? Any information will be greatly appreciated!!

Thanks, everyone!

I had a home-based jewelry business and had to file quarterly in my state. I believe, but it's been a few years and it may differ for baked goods, that you can petition to file less often depending on the amount of sales you bring in. I think there are a lot of variations depending on your state. You may want to call an accountant and just ask to make sure.

This is a great question for jason_kraft ...if he doesn't chime in on this thread, try to PM and maybe he can help you!

Good luck and congratulations! :)

Thank you!! I'm very excited to officially be in business! :)

I'll call an accountant tomorrow and ask about paying quarterly vs. yearly.
 

AUsually you don't need to register as a regular sole prop, you should just be able to start doing business unless you also want an LLC or to be taxed as an S-Corp. You can use your SSN but I recommend getting a separate FEIN anyway to avoid the risk of identity theft.

Sole props are pass-through, which means there is no separate business tax return, you just file a schedule C with your personal return and pay both income tax (based on your personal tax bracket) and self-employment tax (15.3%) on the net income from the business. I recommend using a program like QuickBooks to track your income and expenses, it should automatically generate your net income for you as long as you have entered your sales and expense receipts throughout the year.

If your business runs a loss, you may be able to apply some of that loss to your other personal income, even if it's not related to the business. You only need to pay quarterly estimated tax payments if your sole prop paid taxes last year or you expect to owe more than $1000 in tax.

A

The page says "The simplest type of business structure is the sole proprietorship. In a sole proprietorship, a single individual engages in a business activity without creating a legal entity. There is no filing requirement with the Secretary of State's Office, however, a business registration must be filed with the State Tax Department."

If you don't owe sales tax on your products you probably don't need to file with the State Tax Dept but I would contact them to be sure.

Also, this may seem like a silly question, but how exactly will I know if I am expecting to owe more than $1000 in tax...would that tax be the Self Employment taxes?

You typically use last year's income, so for your first year of operation you shouldn't need to pay quarterly. If you take a loss the first year (which means you don't owe any income or self-employment taxes) you probably won't have to pay quarterly during the second year either.

Okay thank you so much! You've been very helpful :)
 

I would strongly encourage you NOT to proceed with operating a food business as a sole proprietor.  I did notice that you said you were going to get an adequate liability policy but a business operating as a sole proprietorship leaves the business owner with no protection of their personal assets.  Please consider registering as an LLC, which in most states is relatively inexpensive.

I've recently spoken to several individuals that learned the hard way and lost everything.  Say something you bake makes a person/group very ill or worse, you or an employee get into a car accident while making a delivery.  As a sole prop, you are personally liable and your house and any other assets can be taken to satisfy a court judgment.  Don't rely on liability policies alone because there are loopholes in policies and if it can be proven that something happened due to negligence, they may not cover you.

AAn LLC is important, but it depends on the cost of the LLC, the nature of your business, your total personal assets, and your risk tolerance. If an LLC is $100-200/year it's pretty much a no-brainer, but if the cost is $800/year and you have relatively low volume it can go either way.

I definitely agree that it's important to read your general liability policy carefully and be aware of the exclusions. Damage due to negligence (failure to use ordinary care) is almost always covered, but "serious" or gross negligence (which is malicious, reckless, callous, etc.) probably isn't.

Right now, my volume of sales is very low. I pretty much only have had sales from close friends and family. I only plan to do it a couple times a month when I first start out my first year. It will not be my only income, just something I do on the side. I eventually have plans to become a LLC, but right now I am only going to go the Sole Prop route. I am still young, I don't own anything personally. I'm not married and I rent an apartment. Also, obviously I never plan on gross negligence. I would hope a $2 million liability insurance plan would cover me if something were to happen.