When family child care providers think of incorporating their business they often choose to set up a Limited Liability Company (LLC). This is a relatively new kind of business entity that could offer the limited personal liability of a corporation without some of the complex record keeping requirements.
To set up an LLC contact your state's secretary of state office. There will be a filing fee of $40 - $500 (see state list) as well as an annual business fee. In most states you will have to choose a business name and open up a separate business bank account.
As an LLC you must keep your business and personal records completely separate. This can be a challenge since you cannot write personal checks out of your business account. You will have to pay for household expenses (supplies, food, repairs, etc.) out of your personal account and reimburse the business portion out of your business account. But you won't know the business portion (your Time-Space percentage) until the end of the year.
The federal tax rules are exactly the same for a sole proprietor and a one-person LLC. This means you will file the same tax forms (Schedule C, Form 8829, and Form 4562), claim the same deductions and pay the same taxes.
The key benefit of an LLC is limited personal liability. The idea is that if someone sued you she could not get any of your personal assets (house, personal property, savings, etc.). There are, however, several problems with this.
First, since you are using part of your home for your business, the business portion is not protected by the LLC. This means that if your Time-Space percentage was 40%, then 40% of your home (and your furniture and other equipment) is business and would not be protected.
Second, since the LLC is a relatively new type of business entity it's not clear if child care providers would really get the liability protection that is normally granted a corporation. I've heard from lawyers about this and the law is unclear whether an LLC will protect you in a lawsuit over a major injury to a child.
I don't recommend setting up an LLC unless you understand the additional fees and record keeping requirements as well as the possibility that it will not offer you complete personal liability protection. In general, your best protection is to purchase a lot of business liability insurance ($1 million per occurrence and $3 million aggregate).
Don't listen to an attorney who tells you that all family child care providers should set up an LLC. It's more complicated than it may seem at first. There are also other rules to follow as an LLC that I've not covered in this article.
This is the third in a series of articles about business structures. See also "Should You Incorporate Your Family Child Care Business?" , "Should You Form a Family Child Care Partnership?" and "Should You Form an S or C Corporation?"
Photo credit: czech.cz
For more information, see my book Family Child Care Legal and Insurance Guide.