by Joshua Botello
Disclaimer: This is not legal advice and is for educational purposes only. If you need help starting a Cottage food operation please consult with an advisor here.
Business Concept
If you are looking to start your own home-based cottage food business you need to understand what you can and can’t make according to the law. If you don’t follow these rules then you will be denied permits to sell anything and could be shut down and unable to operate.According to the law, there are approved foods that can be made and sold from your business including:
- Baked goods without cream, custard, or meat fillings
- Candy, such as brittle and toffee
- Dried fruit, pasta, and baking mixes.
- Fruit pies, fruit empanadas, and fruit tamales.
- Granola, cereals, and trail mixes.
- Jams, jellies, preserves, and fruit butter that comply with the standard described in Part 150 of Title 21 of the Code of Federal Regulations.
Once you have your products down, you will need to figure out who your customers are and where you are selling your products. This is broken down into 2 classes: (A) which includes sales at farmers markets, bake sales, swap meets, and community bazaars. (B) indirect sales to licensed third-party retail shops where food can be immediately consumed on-premises.
Costs & Revenue
Now that you understand what the Cottage Food Law is about and what you can make for your customers. Let's get you started with estimating your costs and revenue for your new business.If you are just starting out you may or may not have all of the equipment you need to start producing your food products. This is a great opportunity to take inventory of kitchen equipment like a mixer, refrigeration, utensils, and more you require to create your products. You will also need to understand your food cost and how to purchase your ingredients in bulk that you will need on a daily or monthly basis. Places like warehouse clubs such as Costco will have large quantities of food that will be a better value than a run-of-the-mill supermarket. You will also need to factor in the cost of food and the membership needed to purchase.
Now for revenue, you will need to price your products competitively based on your food cost and what other products similar to yours might be priced. You may need to take a trip to the places you might sell and scope out what the competition might charge and figure out your prices that way. Finally, in California, there is a restriction on revenue for cottage food businesses at $50,000 before expenses. You will need to keep track and not exceed this threshold or your business could be shut down completely by the local authorities.
Licenses and Permits
As you are looking to start up your new cottage food business you will need to understand how your company will be set up. There is no requirement for the business to be an LLC but due to the liability, it would be a good idea. You easily just file a DBA when just starting out. You Finally want to think about insurance to mitigate any potential hazards with customers or accidents concerning the business.Registration
Before you can start selling your food products there is registration and permits that will depend on which class you choose. In Los Angeles County, Class A registration is $118 for the permit with a simple self-certification. For Class B businesses, registration will cost $292 and requires a site inspection to be approved. You will also need seller's permits for any type of transaction for your new business.Food handler Certification
The other requirement is a food handlers certification that proves you are trained in proper food preparation. You can take this assessment online for quick certification from many different providers. This mandatory training and certification also trains you on cleanliness, washing, and sanitizing for your home kitchen.Record Keeping
Now that you have your business set up planned out, how can you measure and track your success? Yes, recordkeeping. It’s not the most glamorous part of starting a business, but it is one of the most important. Without tools like QuickBooks or some other kind of bookkeeping software your business could close soon after the start because you weren’t making enough sales or keeping your costs in check to operate for the long term.Tracking Revenue Limitations
Beyond evaluating the health of your business, the cottage food law requires that your business earn less than $50,000 gross revenue before expenses. You will need to closely track your sales as you operate your business. What happens if you exceed that amount? Well, the county authorities can shut your business down from operating as a cottage food operation and may require you to get a commercial kitchen. While that may be hard to reach as you start out your business you may want to plan expansion once you reach that threshold, but you will need to keep track of that.Marketing
Labeling
If you are looking to grow your cottage food business, there are several ways you can get attention and still stay compliant with the law. The first way to market your business is with labeling and what customers see visually when they interact with your product. There are requirements the state of California has for labeling such as:- “Made in a Home Kitchen” needs to be in 12 point font
- The permit number and issuing county (Class B)
- The home kitchen/business address
- A list of ingredients
- A list of known allergens like eggs, wheat, or nuts
- The net weight of the product in pounds or ounces and metric in grams
Website
A website is an invaluable part of any business. According to the cottage food law, you are allowed to advertise and promote your business online with your own website. There are some limitations with marketing online as a cottage food business. While you are allowed to sell online customers need to get their product by personal delivery. No shipping through a UPS, FedEx, USPS, or third-party shipping service. The other limitation with marketing with a website is that customers from other states are not allowed due to differing laws in other states.Social Media
Social media is another way of marketing your food products by showing behind the scenes how it's made or updates on where you will be selling if you do local markets. You can also post promotional photos or advertise. The same rules apply for having a website so no shipping by ups or third parties and no out-of-state orders.Conclusion
So if you are looking to start your own small cottage food business, then this guide will help you on your journey. You can always use a cottage food business to bootstrap to a full-size bakery or restaurant when you exceed the $50,000 revenue. You can use this revenue requirement as a benchmark if you want to expand your business to a commercial kitchen and have a revenue history when you are looking for a business loan. If you are looking to start your cottage food business contact us here at the La Verne SBDC in the description below or sign up as a client at www.lavernesbdc.org/newclient to make an appointment with a consultant.Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
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