How to Start a Baking Business

If you enjoy making delicious treats and crave the entrepreneurial experience, a baking business might hit your sweet spot. The potential upsides—including the degree of both control and flexibility—are mouth-watering. You can start small, even at home, and scale up at a comfortable pace.

The baking industry also has relatively low barriers to entry. You don’t need a college degree or to have studied at a culinary school. You can often gain experience in your kitchen, on the job at a bakery, or in the baking department of a grocery store.

But make no mistake: A full-time baking business generally requires long hours that start early in the day. And the pay isn’t necessarily commensurate with the effort. According to the U.S. Bureau of Labor Statistics, the median annual wage for bakers in May 2024 was $36,650. For bakery owners, the salary range in the United States is $65,782 to $92,958 per year, with the average ringing in at $80,420.

It’s essential to understand what you’re getting into before you start a baking business. Read on to learn some of the most essential ingredients for success.

Choosing your business model

You have several options for business models. You could, for example, launch a home-based business, selling items online or at local farmers’ markets, festivals, and similar events.

Alternatively, you could operate as an e-commerce business, selling online only. You could go the traditional route, with a storefront. Storefronts come with their own options—you might open a standalone bakery, a bakery/café, or sell “grab ‘n’ go” style from a counter. You could also sell your baked goods through third-party stores or coffee shops. Food trucks can give you a farther reach and more flexibility than a brick-and-mortar location.

To avoid getting lost in a crowded field, consider focusing on a particular niche. Potential niches include:

• Specific items (for example, wedding cakes) or ingredients (chocolate)
• Custom orders
• Specialty decorating
• Dietary restrictions (gluten-free, sugar-free, or vegan)
• Desserts for restaurants
• Catering

Planning your baking business

Successful entrepreneurs don’t go into their businesses blindly—they devote a significant amount of time and effort to their planning and research.

Market research should rank high at the top of your to-do list. You need to understand the landscape for bakeries in your desired geographic area. Is the market saturated? Who are your target customers, and how can you reach them? Are they interested in what you have to sell? Think about conducting some tastings to gather feedback.

You should also research your competitors. Review their websites and social media to explore their offerings. Read online reviews for those businesses to see what customers like and don’t like—are there any gaps that you could fill?

Pricing is a vital part of your planning. Your competitor analysis should include their pricing, which you can use as a guide. Competitor pricing shouldn’t be the last word, though. Instead, base your pricing primarily on your “cost of goods sold” (COGS), meaning the total cost to produce an item. A price that exceeds your Cost of Goods Sold (COGS) provides a profit, while a price below that figure results in a loss.

To calculate your COGS, you must account for all of your costs, including:

• Labor
• Ingredients
• Packaging
• Supplies
• Marketing
• Overhead (for example, rent, insurance, and utilities)

You can calculate your COGS for each item or the entire menu. With the latter approach, you can adjust prices accordingly—selling some items below their individual cost of goods sold (COGS) and others above their COGS, so you come out ahead of your total COGS in the end. Remember, too, to consider any economies of scale when calculating COGS. You may find that some items become cheaper to produce as the quantity increases.

All of the information above should be included in your formal business plan.  A business plan is essential for helping you stay on track to achieve your goals. Your plan should include these components:

• Executive summary (the introduction to your baking business)
• Company description (greater detail on your business’s set-up and history)
• Market analysis (data and research on the viability and profitability of your business)
• Financials (budgets, expense and cash flow projections, funding sources, revenue sources, etc.)
• Products and services (descriptions of your offerings)
• Marketing strategy (how you will build a customer base and sell your products and services)

Ensure your financial plans are specific and fact-based, rather than what you hope for in an ideal world. You should budget for both your startup and ongoing costs, including:

• Business registration, license, and/or permit fees
• Equipment and supplies (including baking, office, and other supplies)
• Inventory/ingredients
• Fulfillment costs
• Insurance
• Marketing expenses
• Technology (for example, accounting and payroll software)
• Wages and benefits (if applicable)
• Facilities (if applicable)

Track your costs closely in the first year to ensure a more accurate budget for the future. Once you’re out of the startup phase, your budgets should also include a salary for yourself, a profit to invest further in the business, and taxes. The ongoing monitoring of costs is essential for a baking business, where ingredients (like eggs) can be vulnerable to pricing fluctuations that erode profits.

New entrepreneurs have been known to underestimate their tax obligations. Consult with a professional to reduce the risk of unexpectedly high tax bills, plus penalties and interest for noncompliance with the numerous tax rules for businesses, such as the mandatory quarterly payment of estimated taxes and withholding requirements for income, payroll, and sales taxes.

Funding your baking business

Baking businesses generally require some upfront investment to get off the ground, even if you’re starting small. If you lack personal funds, you must find alternative sources. Your chances of qualifying will improve if you have a detailed and viable business plan that you can present to potential funders.

The U.S. Small Business Administration has several loan programs, and you could qualify for grants from other federal or state governmental agencies, nonprofits, or corporations. The U.S. Chamber of Commerce has compiled a list of grants, loans, and other financial programs available to small businesses. You’ll also find a list of grants and loans available in each state linked in Gusto’s State Resources Hub. (Click on your state, and navigate to the information on grants and loans.) 

Satisfying the legal requirements

Another critical issue is your choice of a business structure—or business entity. A baking business is typically formed as a sole proprietorship, partnership, C corporation, limited liability company (LLC), or S corporation.

Your choice has significant repercussions in terms of legal and tax liability. For example, while a sole proprietorship is usually easiest, you’ll be personally liable for all business debts and liabilities, and you’ll have to pay self-employment taxes. With an LLC, you can avoid personal liability for the business and pay less in taxes, but it’s more complicated, and you must satisfy certain ongoing administrative formalities.

Depending on your entity choice, you may also be required to register your business with the local government, city, and/or state. These jurisdictions may also require specific licenses or permits. You may also need to obtain a “doing business as” (DBA) if you conduct business under a name other than your own.

Local zoning and signage restrictions might apply. A baking business will likely require a sales or seller’s permit and a food service permit, too, along with health inspection certificates.

Many jurisdictions have so-called cottage food laws that apply to home-based food businesses. They typically limit the amount you can sell, where, and to whom. The laws may include labeling requirements and prohibit the use of certain ingredients. They also have different requirements for sanitation and equipment than those that apply to commercial kitchens.

In Illinois, for example, cottage food operations can sell food directly to consumers but not for resale or in retail food establishments. Operators must register with their local public health department and provide a Certified Food Protection Manager Certificate for themselves and any employees who assist in preparing or packaging food products.

The Illinois law prohibits cottage food operations from selling several types of food and drinks, including pumpkin pies, sweet potato pies, cheesecakes, custard pies, creme pies, and pastries with potentially hazardous fillings or toppings. Additional regulations apply to higher-risk items such as frostings, icings, and baked goods containing cheese. If you plan on operating from your home early on or for the long haul, check your local cottage food laws.

Non-home-based bakeries, of course, are also subject to requirements related to food handling certifications (for example, the ServSafe certification), as well as inspections. They’re intended to ensure you properly handle, prepare, and store food to reduce the risk of foodborne illnesses and cross-contamination.

Those are just some of the risks you’ll bear as a baking business owner, so comprehensive insurance coverage, while not legally mandated, is generally a wise choice. A baking business may need some or all of the following types of business insurance:

• Product liability: This coverage protects you from any liability arising from your products, such as for foodborne illness or unlabeled allergens.
• Commercial auto. Your personal auto coverage doesn’t apply to accidents that occur while you’re driving to get supplies, make deliveries, or for other business purposes. Commercial auto also covers theft, weather damage, and vandalism.
• General liability: This provides coverage if someone sues your business for bodily injury, property damage, or personal injury, such as defamation or invasion of privacy.
• Commercial property: Property insurance applies to losses to your owned or rented building, tools, furniture, and equipment that result from fire, burglary, theft, wind, or lightning.
• Workers’ compensation: Your state likely requires workers’ compensation if you have employees. It covers expenses stemming from work-related illnesses or injuries, including medical expenses, lost wages, disability, rehabilitation, and job retraining.
• Business owners policy: This policy bundles general liability, commercial property, and business interruption insurance into a single policy.

Setting up operations

You’ll probably be in the market for some equipment when you’re starting out. Your initial equipment needs will depend on the type of baking business and your growth plans.

The good news is that you don’t need the latest and greatest—you can do just fine with quality used equipment that you may find on Craigslist, Facebook Marketplace, eBay, garage sales, going-out-of-business sales, or auctions. You also might have luck with local or online restaurant supply stores. Or you could make an arrangement with an industrial (or ghost) kitchen, where you can pay a fee to use its commercial equipment.

You’ll also need to source your ingredients. When evaluating your options, consider more than just cost. You want high-quality ingredients from reliable suppliers, backed by client testimonials. Thanks to the internet, you’re not limited to local suppliers.

If you plan to operate a brick-and-mortar business, be smart about the space you rent or buy. Think, for example, about what else is in the area. Are there other businesses or events nearby that draw your target customers to the neighborhood? How close are your competitors? Is the physical layout conducive to baking, or will you need to make some renovations?

Baking is labor- and time-intensive, and you may soon require help to maintain or expand the business. When you determine it’s time to hire, you have a lot to consider. For example, consider whether to go with full-fledged employees or independent contractors. Contractors are generally cheaper because you don’t have to pay payroll taxes, provide benefits, or pay overtime or minimum wage. The IRS rules for contractors are strict, though, and misclassification can prove very costly. You could owe back pay, along with penalties, and end up liable for withheld employee benefits.

Regardless, you’ll need to craft a job description that details the responsibilities and requirements. Post the description where your ideal workers will see it, whether online or off, such as local cooking schools or relevant Facebook groups.

You can help your workers perform better by developing protocols, checklists, and training that outline food preparation, cleaning, and sanitation, and other essential processes. This will ensure consistency and high standards.

Despite the added cost, it’s advisable to run background checks for all employees, especially if they will be working in your home. Check references, as well. Too many employers simply collect contact information for references and don’t actually reach out. You may also want to explore nondisclosure agreements to protect your secret recipes and processes.

When you hire your first employee, you must obtain an Employer Identification Number from the IRS. You may also need to register with the state department of revenue. You’ll be expected to withhold and deposit income tax withholding and each employee’s share of Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). FICA is a federal tax that is split between employers and employees. You’ll also be required to pay unemployment insurance taxes and satisfy a range of federal and state reporting obligations.

Those obligations are among the numerous administrative elements that accompany most businesses. B2B vendors and software can ease your administrative load dramatically, though, allowing you to focus on your core baking competencies.

Marketing your baking business

Your target audience likely has numerous avenues for purchasing baked goods, so you need to devise a plan to help you stand out. Strong branding is the first step. You’ll want to pick a catchy name that immediately conveys what your business does and design (or hire someone to design) a logo that reflects or incorporates the name. You should then consistently include your branding on your packaging, promotions, and other communications.

Word of mouth can be an effective driver for a baking business, especially in the early stages. Provide friends and family with coupons, discounts, and referral bonuses. You can also boost brand name recognition by donating to local bake sales and fundraisers and selling your goods at community events. Explore opportunities to collaborate with local businesses, including event planners, restaurants, and coffee shops. Breweries and similar businesses might be open to pop-ups.

Digital marketing is indispensable these days, and baking businesses can particularly benefit from visual digital media. At a minimum, you need a website with photos (consider hiring a professional photographer), menu, promotions, ordering and contact information, and, if applicable, a calendar of events. Even if you don’t sell online, a website lets people find your business using search engines. And, if they like what they find, they can link to your business on their social media.

You should regularly post to your company’s social media accounts. You can use Instagram, Facebook, and TikTok to share photos of new items or the item of the day, sales, and upcoming events. You can also share SEO-optimized content that’s relevant and useful, including videos or live events where you do baking demonstrations or give tips.

One thing is for sure: when you start a new baking business, you’re going to have a lot on your plate. Check out Gusto’s affordable payroll, employee benefits, and HR solutions.