When you want to start any type of business, you may be required to get a business license. Once you have checked with zoning and the health/ag department about starting a cottage food operation, you should contact the department that issues business licenses. The name of that department depends on where you live: it could be the Department of Revenue, Department of Licensing, Secretary of State, your city hall, or some other government department.
Types of Business Licenses
Here are the four main types of business licenses that cottage food operations should be aware of:
- Sole proprietorship
- Limited liability company (LLC)
Since CFOs are usually run by one person, nearly all of them become sole proprietorships or LLCs. Partnerships are similar to sole proprietorships (except that they require multiple business owners), and corporations are often optimized for larger or more established companies.
How Many Business Licenses Do You Need?
Depending on where you live, you may need a license from your city, county, and/or state, but most CFOs only need to get one type of business license. In fact, in some cases, no business license is required — especially when you are only using your personal name to represent the business. In those cases, you will be considered a sole proprietorship by default.
Fictitious Business Names (DBA)
If you setup an LLC or a corporation, you will create a fictitious business name for it. However, if you choose to become a sole proprietorship, you can still use a custom business name by setting up a “doing business as”, or DBA. Setting up a DBA is usually fairly inexpensive and easy, with a couple important caveats:
You need to make sure that the business name that you want to use is not already registered by another company in your area. Some states and counties have online tools that allow you to look up the names of other registered businesses, but you may need to ask the licensing department before proceeding. If the name is trademarked in your state (or nationally), then that could pose problems down the road.
When you setup a DBA, you need to “announce” the new business name to your area for 30 days in a local newspaper/publication, which is supposed to give people time to dispute it, if necessary. This outdated requirement has spawned many businesses that provide this service for new companies, including finding a publication, adding the listing, filling out the paperwork, etc.
Sole Proprietorship vs. LLC
People often wonder if they should establish their CFO as an LLC instead of a sole proprietorship. A limited liability company is intended to limit the liability of the business owners in case anything goes wrong with the business (e.g. it gets sued). Since an LLC has the potential to protect the personal assets (home, car, money, etc.) of the owner, it has become a very popular choice for CFOs.
However, an LLC does not necessarily exempt you from personal liability, particularly if you are the person who caused the problem (which would be the case for most CFOs, who only have one business owner). An LLC is very useful at protecting your personal assets when someone else (like an employee or another owner) is at fault, but if you are at fault, then an LLC might not help you much or at all.
In some states, LLCs are not heavily taxed, and it does not take much time or money to start one. If it is almost as easy to become an LLC as it is to become a sole proprietorship, then there probably aren’t many downsides to choosing the LLC. However, in California, LLCs must pay a yearly minimum tax of $800, which continues to hurt many CFOs that are trying to get off the ground.
Choosing an LLC is highly dependent on many factors about you and your business, and the best way to make a decision is by consulting with a lawyer. However, I do believe that many CFOs that choose to setup an LLC would be just as well off with a sole-proprietorship coupled with insurance.