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