Starting A Cottage Food Operation – Sales Limit
Many states limit the amount of homemade food that you can sell. This limit is usually spelled out in your state’s cottage food law, and although it’s something you should be aware of, you shouldn’t be worried about hitting it when you’re just starting out.
Types of Sales Limits
Annual sales limits for a cottage food operation (CFO) can vary greatly: they can be as low as $5,000 (like Wisconsin) or as high as $50,000 (like California, Texas, and Missouri). However, about half of the states do not have any sales limit whatsoever.
Sales limits are always calculated based on gross pay, not net profit. In other words, the limit is based on the amount of money you collect from customers, not on the amount of money you personally make.
Although most sales limits are annually-based, there are some exceptions. For instance, Colorado limits sales to $10,000 per product, and Home Kitchen Operations in Illinois are limited to $1,000 of sales per month.
Why Sales Limits Exist
Starting Small
Most cottage food laws intend to give entrepreneurs an easier path toward starting a food business. By using their home kitchens and bypassing the main food laws, they can prove their business concept much faster.
States that implement a low sales limit (e.g. $15,000) often see a cottage food operation merely as a testing ground: once the business shows marginal success, it’s time for them to move into an approved, inspected, commercial kitchen, which all other food businesses are required to use.
Outgrowing Your Kitchen
A separate concern is that — at some point — a business will grow too large for a home kitchen, which could lead to a variety of problems, like food safety issues, excess pressures on residential utility systems (e.g. sewers), or smell “pollution” in the surrounding area. States that implement a “high” sales limit (e.g. $50,000) often want to make sure that the business doesn’t outgrow its kitchen space.
However, a fixed sales volume is often a poor indicator of reaching kitchen limits, for at least two reasons: 1) home kitchens can have drastically different sizes and capacities; and 2) revenue doesn’t necessarily directly correlate to time in the kitchen. For instance, a premium wedding cake maker who sells their pieces of artwork for thousands of dollars could hit a sales limit quickly without using their kitchen much, while a jam maker who sells jars for $8 each might hit the natural limits of their workspace well before reaching the sales limit.
About half of the states do not have a sales limit, and this has not led to any known problems. Using a home kitchen for a business is naturally limiting, and business owners often seek out commercial kitchen space before they hit their home kitchen’s true limits.
Ulterior Motives
Sales limits sometimes get support from an underlying (and often unspoken) reason: fear of competition. Although food safety concerns take center stage when a cottage food bill is under scrutiny, many existing food businesses choose to lobby against the bill (in the name of food safety) for fear that it will put them out of business. Sometimes there is also resentment: for instance, a bakery owner may have had to jump through many hoops when starting their business, and now they see a cottage food law as being unfair.
Enforcement
People often wonder how sales limits are enforced. The short answer is that they are not usually checked or enforced, so CFOs themselves are responsible for making sure they’re abiding by the law. In a few states, CFOs are asked to keep a record of their sales available for review, but even those are usually not checked. Although businesses need to report their yearly income on taxes, the health or ag department is almost certainly not going to be collaborating with the department of revenue to keep tabs on a business.
Even if you don’t care about doing the “right thing”, it’s still wise to stay under the sales limit. In many ways, a cottage food law protects you and your business: as long as you’re adhering to the law, you will have a strong case in court if someone sues you. If you face litigation and someone can prove that you are not following the law, you might not have much of a case to make.
Don’t Let Limits Stop You
Although sales limits are often concerning to entrepreneurs who are just starting out, they seem to be more of a mental barrier instead of a realized one. New business owners really don’t like the possibility that their big idea will be limited in the future, so some don’t start at all! The fact is that most CFOs don’t hit the sales limits (even low ones) in their first year of business, and even if (or when) they do, that’s a great problem to have. Address the limits when you reach them, not when you’re still taking off.
