Should You Set Up a Nonprofit Corporation?
The short answer is no. 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.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://localhousingsolutions.org/plan/engaging-nonprofit-organizations-in-the-development-and-implementation-of-local-housing-programs/
