LLC For Daycare Businesses
When we usually think of daycare or childcare centers, the first things that pop up in our minds are toys, fun, learning, and kids’ activities. However, there is more to running a daycare business than all this—in fact, the formation process, in particular, has several important steps, including selecting the appropriate business structure. One of the best options to choose to open your daycare business as is an LLC.
What Is An LLC?
Limited Liability Company (LLC) is a type of business structure that combines the flexibility of a sole proprietorship and the liability protection of a corporation. In an LLC, the owners, called members, enjoy the advantage of limited liability. This means that your personal belongings and/or assets are protected if your business faces any legal trouble.
Since they are easy to set up and administer and offer a number of tax benefits, LLCs are also particularly popular among small business owners. Moreover, one of the main benefits of an LLC is pass-through taxation. This means that the business’s profits and losses are shared among its members and are reported on their personal tax returns. This will allow your daycare business to avoid something called “double taxation” (where you and the company are taxed separately).
What Are The Advantages Of A Daycare LLC?
Opening a daycare company as an LLC can offer numerous advantages for your business— although the specific benefits may vary depending on your state. Here are some potential advantages to consider:
Owners of an LLC can enjoy the advantage of limited liability, which means they are generally not personally responsible for the company’s debts or financial obligations. If the daycare business were to face bankruptcy or accumulate debt, for example, you would never be liable for repaying those obligations.
Depending on the state you choose to form an LLC in, you can enjoy a ton of tax advantages. These incentives can include tax credits, exemptions, deductions, or reduced tax rates. For example, some states may offer tax credits for hiring and training caretakers or purchasing supplies. Others may provide exemptions or deductions for specific business expenses, such as property taxes or sales taxes.
The tax advantages and programs that many states offer to new and small businesses can be helpful for the development of your company in its early stages.
Pass through taxation
Starting your daycare business as an LLC allows you to avoid the burden of paying taxes twice on the same income. This is because LLCs follow a “pass-through taxation” structure. This means the business’ profits and losses are attributed directly to the individual owners, who are then responsible for paying taxes based on personal tax rates. This can result in significant tax savings and simplifies the tax filing process.
LLCs offer a straightforward and accessible way to establish a business. After all, unlike other business structures, the requirements, and regulations for forming an LLC are less complex and easier to navigate. This allows you to focus on developing and growing your daycare without getting entangled in complex legal requirements.
What Are The Disadvantages Of A Daycare LLC?
The advantages of opening your daycare as a limited liability company greatly outweigh its disadvantages. However, cons do exist—so carefully consider them before you form a daycare LLC.
For instance, transferring ownership of an LLC can be more challenging compared to other corporate structures because of certain restrictions. Unlike corporations, where shares can be bought or sold, LLC ownership transfer requires the agreement of all members involved and refiling in most cases.
This isn’t a big issue if you are its sole owner, at least initially. But if you plan to pass down your daycare business to a friend or family, you have to be aware that there are many legal processes you must go through.
Another “disadvantage” could be how LLCs are more expensive to form compared to sole proprietorships and partnerships. Some states even require LLCs to pay annual fees or franchise taxes to maintain their legal status. Still, remember that LLCs have more benefits and protections than both, making it a more attractive structure to many business owners in the country.
How To Create A Daycare LLC
Setting up your daycare LLC involves a few steps. Don’t worry; it’s not as complicated as it may seem. Here’s a guide to help you get started.
- Choose a name for your LLC
- Choose a Registered Agent
- File the Article(s) of Organization
- Create an Operating Agreement
- Obtain an Employer Identification Number (EIN)
Choose a name for your LLC
The first and most crucial step is coming up with a name for your daycare business. Just make sure that your chosen name is not already in use. You can check the availability of your desired name on the Secretary of State website.
Then, you must adhere to your state-imposed naming restrictions, such as necessitating the use of “LLC” for some. Again, check with your local Secretary to be extra sure.
Choose a Registered Agent
be you, another member of your LLC, or a third-party hire. Just keep in mind that they’re responsible for receiving and managing important legal documents on behalf of your business. Choose someone who is aware, or at least willing to learn about, your local tax laws.
File the Article(s) of Organization
The next and most important step is to submit your Article of Organization to the Secretary of State’s office. This document officially establishes your daycare LLC and provides all the necessary information for operating your business. After the review process, you will receive a certificate confirming the creation of your daycare LLC and its official filing with the state.
The filing fee for Articles of Organization differs depending on the jurisdiction. For example, in Iowa, it costs $100, while in Delaware, it may be $300 or more. Make sure to check the specific requirements and fees in your state.
Create an Operating Agreement
The Operating Agreement is a formal document that outlines your business’ standard operating procedures. It is not a requirement in most states. However, we always advise business owners to draft one. After all, this document covers various important aspects, such as the distribution of profits and losses, basic operational agreements, and member contributions.
By establishing clear guidelines and expectations for all (and future) parties involved, an Operation Agreement will help prevent a lot of misunderstandings and conflict. Remember to hire a reliable lawyer to help you draft this.
Obtain an Employer Identification Number (EIN)
To ensure compliance with federal tax regulations and facilitate proper identification of your daycare LLC, obtain an employer identification number (EIN) from the Internal Revenue Service (IRS). The EIN is a unique nine-digit number assigned by the IRS to identify your business entity for tax purposes.
An EIN is necessary for the following:
- Managing and filing your federal and state taxes
- You must have an EIN to hire staff for your daycare
- Opening a business bank account
Obtaining an EIN for your daycare LLC is a relatively straightforward process. You can apply for an EIN online through the IRS website, or you can submit Form SS-4 via mail.
How Are Daycare LLCs Taxed?
Compared to other business structures, daycare LLCs offer a number of tax advantages. There are two common taxation methods that LLC owners typically go for: a sole proprietorship/partnership one or an S-Corp.
Depending on the number of owners, LLCs are taxed as a partnership or a single proprietorship by default. This means that your earnings are treated as “personal income” and are subject to taxation based on the government’s individual member’s tax bracket. This is filed once a year.
Many daycare LLCs also choose to tax their business as S-Corporation (S-Corp) to minimize the taxes they have to pay on their personal income. This is because S-Corp LLC owners can declare themselves a reasonable salary. The remaining profits go to the company and are taxed separately. It’s the preferred tax structure when your business is profiting a lot.
Finally, remember that various taxes are applicable on LLCs, most of which depend on the state you are based in. An example is that the income tax rates in some states are significantly higher than in others, such as in Missouri and Delaware.
What Are The Costs Of Forming A Daycare LLC?
The costs of forming an LLC can include the costs of filing your Articles of Organization or the costs of hiring a registered agent and even reserving your LLC name. Many of these costs depend on which state you are based in, as some areas have higher name reservation and filing costs, whereas others have relatively low rates.
State filing fee
Registered agent service
LLC formation service
Business license and permits
Employer Identification Number (EIN)
Initial legal and accounting fees
Equipment and supplies
Marketing and advertising
Starting a daycare LLC can offer a lot of advantages, such as limited liability protection, pass-through taxation, and ease of formation. An LLC provides a solid legal structure that can help protect your personal assets and provide credibility to your business.
However, it is important to thoroughly research and consider all the factors involved with the formation, including state-specific regulations, tax implications, and ongoing responsibilities associated with running an LLC. By weighing the pros and cons and seeking professional guidance, you can set up your daycare LLC with little to no hassle.
For a more detailed overview of forming LLCs in various states, check one of our guides below:
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