Business Structure

Choosing the Right Business Structure for Your Home Daycare

Choosing the right business structure for your home daycare business is essential. Common business structures include sole proprietor, partnership, limited liability company (LLC), and a corporation (S or C Corporation). Most daycare businesses incorporate their business to lower taxes and reduce personal liability. Therefore, before deciding which business structure to use, educate yourself on taxes and the legal aspects of a home daycare business. Now let’s discuss the different business structures.

Sole Proprietorship

A sole proprietorship is the simplest business structure to start a home daycare, giving you complete control of the business. In addition, only one individual owns and operates the business without distinction between the business and the owner. This means your business assets and liabilities are not separate from your personal assets and liabilities. If someone sues the business, the owner’s personal assets, such as the house, car, savings account, etc., will be in jeopardy.

Partnership

Partnerships are two or more people that own a business together. Limited partnerships (LP) and limited liability partnerships (LLP) are two common kinds of partnerships. Limited partnerships (LP) have only one general partner with unlimited liability, and all other partners have limited liability. In contrast, a limited liability partnership (LLP) protects each partner from debts against the partnership; they won’t be responsible for the actions of other partners. If you decide to open a childcare business with another person, ensure an operating agreement is in place. An operating agreement is crucial to outline the business’ financial and functional decisions, including rules, regulations, and provisions.

Limited Liability Company (LLC)

The most common business structure for a home daycare is a Limited Liability Company, LLC because it protects personal assets belonging to the owner(s) of an LLC. For example, if the business faces bankruptcy, or a lawsuit, the owner(s) of the LLC are not personally responsible financially or legally. Personal assets include the owner’s savings account, house, and vehicle. It is important to remember that the LLC does not protect the portion of the home used for business. The portion of the home used for business is known as the time percentage.

Therefore, it’s always the best practice to have a business liability insurance policy. From a tax perspective, convert an LLC into an S-Corp if the business makes over 50k a year and when the self-employment tax exceeds the tax burden the S-Corp faces. To do this, you must use IRS form 2553 to elect to have the LLC treated as an S corporation by the IRS for tax purposes.

Corporation (S or C Corporation)

C-Corp is a legal entity that’s separate from its owners. Corporations can make a profit, be taxed, be held legally liable, and sometimes be taxed twice. S-Corp is a particular type of corporation designed to avoid double taxation. It allows profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates. Corporations offer the most robust protection to its owner(s) from personal liability, but the cost of forming a corporation is higher than other structures. In conclusion, contact an accountant to better understand the different business structures and what’s best for you.

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