Should You Form a Family Child Care Partnership?

6a0133f3fc5805970b01538e501f50970b-320wiAt 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.

I’ve written about the pros and cons these business structures at length in my book Family Child Care Legal & Insurance Guide. See also my article, “The Consequences of Incorporating.”

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?”

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Legal & Insurance For more information, see my book Family Child Care Legal and Insurance Guide.

Categories: Incorporation, Legal & Insurance

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2 replies

  1. I have a question about your comment regarding husband/wife partnerships. My husband & I run our home childcare together. For the first 2 years, we filed under my name as the sole proprietor, and I paid him a small amount as an employee. But I started to wonder how this would affect him in retirement, since he was not getting hardly any Social Security credit (meaning, his earnings that are reported to SSA that are used to calculate SS benefits).
    So I asked my CPA about it & she suggested that we file as a partnership because the IRS allows a 2-member partnership – if husband/wife – to file two Schedule Cs, rather than having to file partnership returns. So we have just been splitting everything 50/50 & filing 2 Schedule Cs with our joint tax return. But reading your comment that “it makes no sense to form a partnership w/your husband”, it makes me worry about our arrangement – should I be doing things differently? Thank you for your time!

  2. It is true that you can become a “qualified joint venture” by splitting the income and expenses from your business on separate Schedule Cs. If your husband does 50% of the work, then he can report 50% of the profit and get the corresponding Social Security benefit. You would not be filing as a partnership, you would be filing as two sole proprietors.
    Before you do this, I would check with the Social Security office to see what would be the impact on both your Social Security benefits by taking this step. It’s not clear which way would create a better deal for your family.

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