Works of art, including cartoon characters, toys, sculptures, and more, are copyrighted. That means that, except for very special uses, such as editorial, nobody has the "right" to "copy" or use or recreate that work of art in any way without the holder of the copyright granting specific written permission to do so. That means recreating them by making a sculpture, a photo, a painting, a drawing, whatever.
People have been successfully sued for publishing photos of famous sculptures that have tens of thousands of images of it floating about. But it's like speeding. No matter how many other people are violating the law, if you get pulled over, saying that everyone else was doing it too isn't a valid excuse for YOU breaking the law, and you'll end up paying the ticket.
That said, it's usually not worth it to go after someone who uses the image for personal, private and especially non-commercial use. But that doesn't mean they can't and, win or lose, it could cost a small fortune to defend the use in a lawsuit.
On the other hand, if using the copyrighted character in any way helps you make any money, you're in a whole new ballpark of possible financial pain, because copyright holders take that a lot more seriously. And that's 10X as true when the copyrighted work of art is owned by a large and litigious corporation, as most famous cartoon characters are. (see "Disney", for a prime example)
You don't have to be selling the character or its image either, just using it in association with promoting your own business is enough.
As an example, when a business uses one of my photos without my permission, they're rarely trying to sell copies of the photo itself or the object in it. Instead, they're using the photo to promote their business somehow.
So, a tow truck company might be using my photo of an old beat up and rusting tow truck I found out in the desert of Arizona to make their tow truck business web site more interesting, appealing and fun. A real estate company uses one of my cityscape photos on their website to show how beautiful and interesting the area where they sell real estate is. Etc., etc., etc., you get the idea.
Then, as I find the copyright violations, I hand them over to my attorney, and he sends them each a letter demanding they disclose any other ways or places they've used my copyrighted art, pay a reasonable license fee based on their use (what my attorney and I consider reasonable given the circumstances), or they can instead hire an attorney themselves and get ready to be sued for a whole lot more.
They used my copyrighted art without my permission to promote their business, and that's a copyright violation. You want to use someones copyrighted art without their permission to promote your business, and that's a copyright violation in the same way.
Maybe you'll get away with it, maybe you won't. Maybe you could even win in Federal court (where all copyright cases are decided if they're not settled out of court). But it's a monetarily dangerous game to play, and I recommend you don't take the chance.
The proper way to handle anything that has to do with using someone else's copyrighted work of art in any way is to contact the owner of the copyright, explain your situation and ask nicely for permission to do what you intend, get their answer, and go from there.
In many cases, they will grant permission because it helps promote the product(s) they're trying to market and sell, and you are helping them do that with your own business by featuring them on your cakes, so don't think they'll automatically say no or that they'll want a bunch of money.
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