Should You Incorporate Your Family Child Care Business?

6a0133f3fc5805970b0154321e5cda970c-320wiFor the vast majority of family child care providers the answer is “no”.

There are four basic types of business structures under which you can operate your business: sole proprietor (also known as self employed), partnership,  a single person Limited Liability Company (LLC), and a corporation (S or C corporation).

Once your start your business you are automatically treated as a sole proprietor. There are no forms to fill out. If you are going to consider operating under one of the other three options you should know that this can be a very complicated decision with both tax and legal complications. Therefore, before making this decision I strongly recommend that you consult with both a tax professional and an attorney that understand family child care.

There are two basic reasons why child care providers consider other business structures: lower taxes and personal liability protection.

Taxes

There are no tax savings if you form a partnership or LLC. There may be some tax savings if you operate as a corporation, but probably only if you have a profit of at least $30,000 each year. Also, beware that you will lose the ability to deduct your house expenses if you form a partnership or corporation.

Personal liability

If you form an LLC or incorporate your business you may get some personal liability protection. This means that your personal assets may be protected if you are sued. However, you should not assume that such protection is automatic. If you are negligent and a child is injured or if you are accused of child abuse – being incorporated won’t protect you. In addition, there are many business formalities to follow as a corporation (separate business and personal records, stockholder meetings, following your bylaws, etc.) and if you fail to follow them all you could lose this protection.

Summary

Forming a LLC or a corporation is no substitute for having an adequate amount of business liability insurance. With this insurance you can protect yourself from most risks associated with your business. Check out this child care insurance directory. Child care providers who have a large business profit each year (at least $30,000), have a significant amount of personal assets they wish to protect, don’t mind doing extra record keeping, and plan to be in business for a number of years may want to look into a business structure other than a sole proprietor. If this is you then you should seek out professional legal and tax assistance first.

But everyone else should keep operating as a sole proprietor.

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 of about business structures. See also  “Should You Form a Family Child Care Partnership?” “Should You Set Up a Limited Liability Company (LLC)?” and “Should You Form an S or C Corporation?” and “Should You Set Up a Nonprofit Corporation?”

Image credit: firrhillcentre.com

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



Categories: Incorporation, Legal & Insurance

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25 replies

  1. I incorporated almost a year ago because it was suggested to me by several people. One benefit according to my CPA is that my chances of being audited are much lower with an s-corp than a sole proprietor. However, there is significantly more paperwork and record keeping to maintain the corporate veil. And after paying taxes this year I’m not sure I saved any money!

  2. It used to be that corporations were audited less than sole proprietors but the tide is turning so I’m not sure if this is true anymore.

  3. I’m considering opening a daycare center outside my home. Would the LLC be the best choice for protection?

  4. Yes, an LLC makes sense if you are operating outside your home. It is the least complex types of incorporating. I would still recommend talking to an attorney and tax professional so you can understand all the pros and cons of choosing a business structure.

  5. I just opened a group family daycare in my home. I have two other women that work with me. We split the income and we all put in 250.00 a month for rent, utilities, etc. I am not sure if this is going to hurt me when I do my taxes? Is there a better way to get help from them financially?

  6. You can’t do what you are doing because you have to choose a business structure to operate under. My recommendation is for you to be a sole proprietor and hire the other two women as your employees. Any other option (partnership, corporation, LLC) would be more complicated, more record keeping, and possibly higher taxes. See my book Family Child Care Legal & Insurance Guide for details or call me at 651-280-5991.

  7. After many people suggested it to me, mid 2011 I incorporated. Now as I realize it was a bad idea! Can I give up the corporation and file as a sole propreiter?

  8. Yes, you can dissolve your corporation. Go to the secretary of state’s office to get the form to do this.

  9. I plan to start a family child care as sole proprietorship but would like to be able to have a name for my business other than (or in addition) to my own. Is this possible?

  10. Yes, you can have a business name and operate as a sole proprietor. Contact your state secretary of state’s office to register your business name.

  11. Is it a good idea to form a S-corp for the purposes of being able to produce pay check stubs and verify income (which is difficult sometimes as a small business owner and sole prop)…

  12. No, it’s not a good idea to form an S-corp for record keeping purposes. There are too many negative consequences to incorporating.

  13. I rent a separate building to do Childcare. I have been a sole proprietor but am looking to just go partners with someone. We would make roughly 60,000 plus.. I’ve done the pay someone & take out taxes, work comp. Etc. What are your thoughts? I cover insurance on my childcare & kids, do food program..

  14. If you are asking whether it’s better to form a partnership with someone or hire them as your employee, my advice would be to hire them as your employee. When you form a partnership you give up your right to make all the decisions, you don’t save any money on your taxes, and you take on additional risks because you would be responsible for anything the partner did.

  15. Where can I get A List for taxes on what I all need to be writing down? I have been wtiting all down but when going in for taxes not using any of the hours for cleaning…book work…I need to see what all I am supposed to keeping track of? Any Help Please.

  16. I am working on my FCC license application and am confused about forming a corporation. The only reason why I want to form corporation is saving on taxes. I don’t know much about corporation and if I should file it before getting the license or after. Kindly advice.

  17. It’s unlikely you will save money on taxes by filing as a corporation unless you are making a profit of more than about $30,000. I’ve written an article about this: http://www.tomcopelandblog.com/2011/06/should-you-form-an-s-or-c-corporation.html

  18. I’m a director of a daycare. Do I have any personal liability? How do I protect myself?

  19. You do have potential personal liability if a child is injured or a parent sues you. Get professional business liability insurance to protect you. Look at the insurance directory on my blog for agents that can get you this insurance.

  20. Does becoming an LLC for an in home daycare have anything to do with the name I choose of my in home daycare? For example, the name I’ve chosen is the same name as a child care center in my area, which I did not know at the time of choosing my name. Will I get in trouble for having the same name?Thank you.

  21. Disclaimer – not a lawyer or CPA – not sure if these are valid or not

    Aren’t there benefits of workers comp and unemployment insurance when you are hired by your own S corp for providing family childcare? In addition to savings on Self employment taxes

    If you happen to close the business as a sole proprietor, you cannot claim unemployment. But if you close business as a S corporation and are employed, you can claim unemployment. Same for workers comp. If injured as a sole proprietor, no coverage but if injured as an employee of the corporation, there is coverage

    On the other side, there are special taxes on S corp. CA charges 1.5% tax on S corp income. Min tax is $800 which is roughly equal to moving $5000 income into distribution instead of SE applicable

    • This is a complicated question with no simple answer. If you set up an S Corp you will get covered by workers compensation and unemployment. These are now tax deductible, but you are paying for them when you wouldn’t have to pay for them if you remained self employed.
      In my opinion the only time providers should consider setting up an S Corp is if they have a lot of personal assets, don’t mind doing a lot of additional paperwork, plan to be in business for many years, and will consistently make a profit of at least $30,000 a year. There are extra expenses associated with an S Corp, you will lose the ability to depreciate your home, it will cost more to have your taxes done. The extra record keeping in the killer. You can’t write a check out of the business account for anything that is personal. Therefore, when buying light bulbs and toilet paper, you have to write a check out of your personal account. Then, at the end of the year you will multiply these shared expenses by your time-space % and write a check out of your business account to your personal account for this amount. I discuss in detail the tax and legal issues involved in incorporating in my book Family Child Care Legal & Insurance Guide. The best way to protect your personal assets is not to incorporate, but to purchase a lot of business liability insurance.

  22. Hi Tom,
    My friend and I are planning on opening a Group Family Day Care on the ground floor in my home.
    1. He is the principal owner of the business because he is funding it all.
    2. The company will pay me rent (but I will give a rent reduction for my contribution).
    3. I am the smaller partner (or should I be just a shareholder?) keeping my name off.
    4. Should the company be an LLC or S Corp?
    5. At the end of it all, neither one of us want to personally liable if any law suits take place (taking my home for example).
    6. If the business does flop, I want to be able to file for unemployment. I know that as a partner, according to NYS labor laws, I don’t get squat !!!
    7. How will this affect both our taxes separately & as a company, especially with my house involved

    Whats your best advice Tom….Help

    • This is a complicated question involving legal and tax issues. An LLC is a type of corporation. You can have a S Corp LLC, a single person LLC or a partnership LLC. An LLC, in general, is better than an SCorp because it’s simpler to operate. As an S Corp you would be hired as an employee (as would your friend) and would both be eligible for unemployment insurance. But, the corporation would have to withhold Social Security/Medicare taxes, pay federal and state unemployment taxes and purchase workers compensation insurance. You would have to report the rent as income on Schedule E where you could claim some house expenses to reduce this taxable income. Even as a corporation you can’t screen part of your home and furniture from liability because you are using them for the business. You want a lot of business liability insurance to protect your both. You can’t eliminate all personal liability, that’s why you need the insurance. Incorporating alone isn’t enough to protect you both.
      If you form a partnership neither of you can get unemployment benefits, you wouldn’t owe unemployment taxes or need to get workers compensation insurance. You would need to prepare a written partnership agreement that you file with the state. Again, the partnership can pay you rent but you must report it as income on Schedule E. You would need to put in the partnership agreement who owns what and what will happen to the assets if the partnership is dissolved. You would be be personally liable for anything that happens so you need business liability insurance.
      I would strongly recommend consulting with a local tax preparer who can explain the tax consequences of all these options.

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