I mentioned last week that Cottage Food Laws allow early stage food entrepreneurs to make products in a home or farm-based kitchen and test the commercial feasibility of the products at farmer’s markets or public events without obtaining a license. The framework is available to businesses that do not generate more than a specified threshold in annual revenue ($25,000 in Maryland).
Not surprisingly, cottage food products must be “non-hazardous”. What does that mean? In Maryland, if you are not a licensed entity, it means that your product must be named on a list of cottage foods published in COMAR 10.15.03.27, and you must comply with the associated labeling regulations and subject your kitchen to inspection. I will make an educated guess that a similar scheme exists in other states, but be sure to consult an attorney in your state if you need to know.
My reason for mentioning Cottage Food Laws is that they may serve a purpose for some readers, but if the prospect of capping your annual revenue doesn’t appeal to you or your product is not on the relevant list, then you will either need to get the law changed or find another path to market. On that note, let’s think about what it takes to set up a licensed food business, but before we do that, I’d like to offer a few comments about structuring your business.
While it is perfectly legitimate for one or more individuals to obtain a license to make products for sale as a sole proprietor or partnership, there are a myriad of reasons for first organizing a business under state law that is distinct from its ownership. For the purposes of this discussion, we’ll consider incorporating or organizing a limited liability company (LLC).
A key reason for choosing one of these structures is to limit the liability of business owners for the debts and obligations of the business. This is particularly important in the food business, where you’ll be making products for human consumption! You will strive to produce safe, quality food products, but even large operations with robust food safety and quality programs are susceptible to adverse events such as market withdrawals and recalls. While going out of business due to such an event isn’t ideal, it’s better than losing everything you own personally in the process. Both corporations and LLCs are structures you can own – alone or with others – that help separate the liabilities of your business from your personal liabilities.
How do you choose the structure that is right for you? It really depends on your goals for your business, as well as certain tax considerations, among other things. In my next post, I will offer up some points for you to consider as you decide which type of business structure is right for you.
As a prelude, I will discuss corporations taxed according to either Subchapter C or Subchapter S of Chapter 1 of the Internal Revenue Code – commonly known as C-corps or S-corps, respectively, and LLCs.
For more information on this topic, please contact Scott Lloyd at firstname.lastname@example.org.
ABOUT SCOTT LLOYD
Scott Lloyd is a registered patent attorney who specializes in intellectual property counseling and commercialization work. He has served as a technology commercialization specialist and advisor to companies in a diverse array of markets, including biotechnology, pharmaceuticals, medical devices, food and beverage, specialty chemicals, technology and engineering. In addition, Mr. Lloyd spent ten years as in-house general counsel to small and mid-sized companies, where he managed corporate matters and resolved commercial disputes in addition to intellectual property strategy, and now serves in the same capacity for entrepreneurial clients. He serves as counsel to small and mid-sized business owners seeking to implement growth strategies and succession plans.
While in house, Mr. Lloyd has also contributed to the successful formation of international affiliates of domestic businesses as well as a $400,000,000 business acquisition.
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