At the time it sounded like a good idea. You and a friend decided to care for children together in your home and split the income and expenses. You called yourself a partnership but you didn’t write up a partnership agreement.
To keep things simple you decided that you will claim your house expenses on your tax return and your friend will report her income and some business expenses as an independent contractor on her IRS Form Schedule C.
I have heard about this situation from family child care providers across the country. Sometimes the partners are mother and daughter or husband and wife.
Unfortunately, you can’t operate your business in this fashion.
You must either structure your business as a partnership (and follow the rules of a partnership), a sole proprietorship (self-employed), a single person Limited Liability Company (LLC) or a corporation. That’s it. If you try to run your business as an informal partnership as described above you will run into trouble from the IRS. In addition, if a child is injured you both can be sued.
A partnership is an unincorporated business run by two or more people who share the profit and loss. What are the consequences of operating as a partnership?
You must file a partnership agreement with your state secretary of state office that spells out the rights and responsibilities of each partner. You can split the income and expenses however you want between you and your partner. Either partner can end the partnership at any time. Each partner is legally liable for the actions of the other partner.
You and your partner must file partnership tax forms and there are no tax savings over a sole proprietor. The record keeping rules for a partnership are more complex than a sole proprietor as you must keep your business and personal expenses completely separate. Any items that the partnership purchases are the property of the business, not the partners individually.
As you can see, there aren’t really many benefits of forming a partnership other than making each person responsible for the business. Forming a partnership with your husband makes no sense. Have him work for free or hire him as an employee. But read this article and then this article before you hire him.
What’s a better alternative than a partnership?
You can be a sole proprietor and hire your friend to be your employee. The person who owns the house where the child care is offered should always be the employer so they can continue to deduct all house related expenses.
This article is part of a series about business structures. See also “Should You Incorporate Your Family Child Care Business?” , “Should You Set Up a Limited Liability Company?” , “Should You Form an S or C Corporation?” and “Should You Set Up a Nonprofit Corporation?”
Image credit: seiu.org
For more information, see my book Family Child Care Legal and Insurance Guide.