LLC or Sole Proprietorship for Home Day Cares
A home daycare can be a personally and financially rewarding small business venture. One of the most important decisions you must make when you decide to start a home daycare is what type of business entity you are going to choose for your business. Both a sole proprietorship and a limited liability company, or LLC, have advantages and disadvantages. Which entity you ultimately choose will depend on your specific circumstances.
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Sole Proprietorship
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A sole proprietorship is essentially just the legal designation given to an individual running a business. If a formal corporation has not been formed, and there is not another person involved in the ownership of the business, then the business is a sole proprietorship. You are not required to execute or file any legal documents to operate a sole proprietorship; however, you may choose to register your business name with the Secretary of State and/or obtain an employer identification number, or EIN, from the IRS.
LLC
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A Limited Liability Company, or LLC, is a hybrid entity in that it combines some features of a corporation with others of a sole proprietorship or partnership. As a rule, an LLC is more flexible in the management of the company than a corporation but more structured than a sole proprietorship. Individual states govern the specific requirements and limitations of an LLC. In order to form an LLC, you must file articles of incorporation with the state where your LLC is located.
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Taxes
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For tax purposes, a sole proprietor files an individual tax return along with a Schedule C -- Profit or Loss from Business. While business expenses may be deducted on the Schedule C, a sole proprietor must also pay self-employment taxes. The IRS does not recognize an LLC as a separate entity for tax purposes. An LLC must elect to file as a corporation, partnership or sole proprietorship. If you elect to file as a corporation, you are essentially taxed twice -- once at the corporate level and again at the shareholder level. An LLC also requires profits and losses to be reported on each owner's return. Finally, some states require the payment of additional taxes in the form of capital value taxes or franchise taxes. As a home daycare, you may end up paying more in taxes as an LLC than you would as a sole proprietorship; however, you should consult an accountant regarding the particulars of your business to be certain. Filing as a corporation would not benefit a home daycare business. Unless you have a partner, you cannot file as a partnership. Therefore, even if you elect to form an LLC, you may be taxed as a sole proprietorship except you may be required to pay the additional state taxes imposed on an LLC.
Liability
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A sole proprietor is open to personal liability for all acts or omissions of the business. If you operate a home daycare as a sole proprietor, you can be held personally responsible for all debts of the business as well as all injuries that can be attributed to the business. An LLC, on the other hand, provides essentially the same liability protection that a corporation provides for the owners or shareholders. From a liability standpoint, an LLC may be the better choice for a home daycare as caring for children involves a high risk of accidents. Personal liability for an accident could result in a large judgment against you. You may, however, be able to purchase liability insurance that will provide you with liability coverage for injuries if you elect to operate as a sole proprietor. Since liability insurance can be expensive, this is another reason to consider an LLC instead of a sole proprietorship. Liability insurance, however, will not limit your exposure to liability for debts of the business as a sole proprietor.
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