Should You Set Up a Nonprofit Corporation?

6a0133f3fc5805970b014e8ba36996970d-320wiThe short answer is no. In previous articles I’ve discussed the various business structures a family child care provider can operate under. After considering the LLC, S or C Corporation, and partnership, I concluded that being a sole proprietor (also known as self employed) is the best option for family child care providers.

The primary reason why child care providers consider setting up a nonprofit corporation is because they want to receive charitable contributions from individuals or corporations. They believe that this would be a good way to get funds to help their business.

To be entitled to receive charitable contributions, you would have to incorporate your business as nonprofit tax-exempt. This involves two steps. First, you would incorporate as a nonprofit, which is not difficult. Contact your state Secretary of State’s office for the proper forms to file.

Being a nonprofit, however, creates some negative tax consequences. You will lose some of your house deductions, similar to an S or C Corporation. You will also be required to do more record keeping and follow the formalities of a corporation which can be burdensome.

The second step is to apply for tax-exempt status from your state and the IRS. This is a much more difficult, if not impossible, task. A tax-exempt nonprofit is intended to benefit the public, rather than its owners. Tax-exempt nonprofits can also avoid paying local sales tax.

It’s highly unlikely that the IRS will approve you as a tax-exempt organization unless you can show that you are offering a community service that reaches more than just a handful of children. (Child care centers would not have a problem meeting this test.)

Before taking any steps to incorporate as a nonprofit, or to seek tax-exempt status, I strongly recommend that you consult with a lawyer and tax professional to advise you about the consequences of your decision.

For more information about nonprofits and other business structures, see my book Family Child Care Legal & Insurance Guide.

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 (LLC)”“Should You Form a Family Child Care Partnership?” and “Should You Form an S or C Corporation?”

Tom Copeland – www.tomcopelandblog.com

Image credit: layoutsparks.com



Categories: Incorporation, Legal & Insurance

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1 reply

  1. I tend to agree with this. In many states like mine the tax implications of incorporating are simply too expensive.
    If you’re doing it for the financial protection, you may want to look at general and professional liability insurance policies with an umbrella instead. This can be far cheaper and offer even more protection than incorpotating either as a non-profit, C corp or even LLC.

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