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Daycare and Taxes>Should Daycare Become An LLC or Not??
crmommy 07:01 PM 03-10-2011
I am at my wits end with conflicting advice from 2 tax people, 2 insurance people and an attorney. I have been doing home daycare for a year now so this is something I probably should have done before...better late than never.
I was told recently by a good friend who also has a home daycare that I should become an LLC because it would seperate my personal property from any liability, basically I couldn't get sued for my house and cars if god forbid something happened and I was in a legal situation.
What is true?
I've heard yes and no and I've heard get more insurance, but how much?? I was told 2 different things about how my taxes would need to be done, that a: nothing changes but my tax id and b: I have to file a seperate return and don't get to deduct nearly as much as I can know..(really don't like that option!!)
Can anyone advise me on what you know and also what you do. I just found this forum tonight searching and will definately be back because it looks like there is so much great information and great people here. Thanks for your help!!
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daycare 07:15 PM 03-10-2011
Welcome to the form
I would address this question to tom. He is the tax guru for daycare aka the god father. Lol
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crmommy 07:24 PM 03-10-2011
I know, I actually have one of his books in front of me. Obviously not the book that helps me with this though...I'll adjust my title I guess for him to see??Thanks!!
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TomCopeland 11:03 AM 03-11-2011
There are pros and cons for setting up an LLC:
Pros: you may get some extra liability protection for your personal assets
Cons: It will cost you some money to set one up and there are annual fees (not too much). You will have to keep your business and personal records separate (more paperwork).

If you set up a single person LLC you fill out exactly the same tax forms as a sole proprietor (Schedule C, Form 8829, etc.). Your taxes will be the same. So, you won't lose any tax deductions. If you set up a corporate LLC or a partnership LLC then there are different tax forms to fill out and you will lose the ability to deduct your house expenses.

Liability - You won't get full liability protection for your personal assets. For example, let's say your time-space % is 40%. That means 40% of your assets are business and these are not protected if you are an LLC. In other words, if someone sues you only 60% of your home is protected, the person suing you can come after 40% of your home which is a business asset and not protected by an LLC.

I recommend getting a lot of business liability insurance to protect yourself - $1 million per occurrence and $3 million aggregate. I don't think it's worth considering an LLC unless you are comfortable with more record keeping and have a lot of personal assets you are trying to protect.

For details on all of this see my Family Child Care Legal and Insurance Guide (www.redleafpress.org).
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crmommy 12:55 AM 03-12-2011
Thank you so very much for explaining it in "english" and breaking it down "barney style" I swear I had more brain cells before I had kids and started doing daycare and should have understood it, but I was getting conflicting information. Thank you again!! Your help was very much appreciated and will make my decision much easier!
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Unregistered 07:04 AM 06-15-2018
Question for Tom when you say liability under a single owner LLC can the sue and take your business income from what we make from our daycare?
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TomCopeland 11:33 AM 06-15-2018
Originally Posted by Unregistered:
Question for Tom when you say liability under a single owner LLC can the sue and take your business income from what we make from our daycare?
No matter how you incorporate your business, if you are sued they can take your business assets. This includes all money from your business and your business property (equipment, toys, as well as the business portion of your home and furniture and appliances). It's your personal assets that are presumably protected from a lawsuit.
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eperez 06:45 AM 10-11-2018
Originally Posted by TomCopeland:
There are pros and cons for setting up an LLC:
Pros: you may get some extra liability protection for your personal assets
Cons: It will cost you some money to set one up and there are annual fees (not too much). You will have to keep your business and personal records separate (more paperwork).

If you set up a single person LLC you fill out exactly the same tax forms as a sole proprietor (Schedule C, Form 8829, etc.). Your taxes will be the same. So, you won't lose any tax deductions. If you set up a corporate LLC or a partnership LLC then there are different tax forms to fill out and you will lose the ability to deduct your house expenses.

Liability - You won't get full liability protection for your personal assets. For example, let's say your time-space % is 40%. That means 40% of your assets are business and these are not protected if you are an LLC. In other words, if someone sues you only 60% of your home is protected, the person suing you can come after 40% of your home which is a business asset and not protected by an LLC.

I recommend getting a lot of business liability insurance to protect yourself - $1 million per occurrence and $3 million aggregate. I don't think it's worth considering an LLC unless you are comfortable with more record keeping and have a lot of personal assets you are trying to protect.

For details on all of this see my Family Child Care Legal and Insurance Guide (www.redleafpress.org).
Hi, I am planning to open a child care facility (not in my home). I have asked my accountant for advice on whether I should incorporate or be an LLC but have not received an answer.

My concern is based on having to pay income taxes on my personal returns as opposed to having the company pay for them. My understanding is that an LLC can elect to be a corporation. How would that work? I would prefer to receive a regular pay check, like any employee with taxes withdrawn and have the company responsible for the company's income taxes. What do you suggest?

Any advice/direction would be most appreciated!
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TomCopeland 11:15 AM 10-11-2018
Originally Posted by eperez:
Hi, I am planning to open a child care facility (not in my home). I have asked my accountant for advice on whether I should incorporate or be an LLC but have not received an answer.

My concern is based on having to pay income taxes on my personal returns as opposed to having the company pay for them. My understanding is that an LLC can elect to be a corporation. How would that work? I would prefer to receive a regular pay check, like any employee with taxes withdrawn and have the company responsible for the company's income taxes. What do you suggest?

Any advice/direction would be most appreciated!
Yes, you can set up an LLC as an S or C corporation. It only makes sense to do this if you are making a lot of money. That's because if you are the employee of the corporation the corporation will have to pay federal and state unemployment taxes and it will need to purchase workers compensation insurance for you. These are additional costs that wouldn't occur if you were a single person LLC or self employed. So, you need to ask your accountant to show you what the tax consequences would be of this decision. I say, remain self employed.
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eperez 07:06 AM 10-12-2018
Originally Posted by TomCopeland:
Yes, you can set up an LLC as an S or C corporation. It only makes sense to do this if you are making a lot of money. That's because if you are the employee of the corporation the corporation will have to pay federal and state unemployment taxes and it will need to purchase workers compensation insurance for you. These are additional costs that wouldn't occur if you were a single person LLC or self employed. So, you need to ask your accountant to show you what the tax consequences would be of this decision. I say, remain self employed.
Thank you for the clarification!
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Julia2 06:05 PM 12-31-2019
Oh , I thought for a daycare I have to open a LLC, so what is your advice in my case, my accountant toll me if I open a LLC I can chose how to pay taxes , I can choose pay taxes as an individual, or ‘S’ O ‘C’, my home daycare will be small with 6 children, do I open a LLC or no, I am planing to do this on January 15, as far as I know from YouTube , please correct me if I am wrong, they say as an individual self employment I can’t do many deduction like the use of my home , car, etc; but if I create a LLC and do my taxes as S’ I can do deductions, is this true , what will be better in my case, thank you
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284878 09:27 AM 01-01-2020
Originally Posted by Julia2:
Oh , I thought for a daycare I have to open a LLC, so what is your advice in my case, my accountant toll me if I open a LLC I can chose how to pay taxes , I can choose pay taxes as an individual, or S O C, my home daycare will be small with 6 children, do I open a LLC or no, I am planing to do this on January 15, as far as I know from YouTube , please correct me if I am wrong, they say as an individual self employment I cant do many deduction like the use of my home , car, etc; but if I create a LLC and do my taxes as S I can do deductions, is this true , what will be better in my case, thank you
Sounds like your accountant does not understand daycare taxes and you might want to find a new one. I recommend that you check out www.tomcopelandblog.com and ask him these questions directly. You can message him through here also. He is a well known author and lawyer for daycare taxes.
You can also find his classes on YouTube.
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TomCopeland 09:20 AM 01-02-2020
Originally Posted by Julia2:
Oh , I thought for a daycare I have to open a LLC, so what is your advice in my case, my accountant toll me if I open a LLC I can chose how to pay taxes , I can choose pay taxes as an individual, or S O C, my home daycare will be small with 6 children, do I open a LLC or no, I am planing to do this on January 15, as far as I know from YouTube , please correct me if I am wrong, they say as an individual self employment I cant do many deduction like the use of my home , car, etc; but if I create a LLC and do my taxes as S I can do deductions, is this true , what will be better in my case, thank you
You are not required to become an LLC! 99% of providers are self employed. If you set up a single person LLC, you will deduct all the same deductions as being self employed. If you set up any other type of LLC, you will lose the ability to depreciate your home! Becoming an LLC means you will have to keep your business and personal records separate. That is very difficult to do. I'm happy to discuss this if you call me at 651-280-5991.
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Julia2 05:20 AM 01-08-2020
Thank you for answer me, so what is the benefit to became a Single person LLC?, the only reason that I was thinking to became a LLC is for protection in case someone have a problem and the insurance in not enough to cover, is there any LLC home daycare that can tell me the benefits or disadvantage ,I was planning to became a single or individual LLC, as a individual LLC can I do my taxes as a self employed, were I can deduct the depreciation of my house, etc?, thank you
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Julia2 06:04 AM 01-08-2020
How much is home daycare insure 1 million and 4 million to avoid becoming LLC?, were I can get it?, If I have a LLC an a parent suit me, does he suit just my LLC or also my others assets?, as a individual LLC do I have to get another number for my taxes ?, thank you
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TomCopeland 07:57 AM 01-08-2020
Originally Posted by Julia2:
Thank you for answer me, so what is the benefit to became a Single person LLC?, the only reason that I was thinking to became a LLC is for protection in case someone have a problem and the insurance in not enough to cover, is there any LLC home daycare that can tell me the benefits or disadvantage ,I was planning to became a single or individual LLC, as a individual LLC can I do my taxes as a self employed, were I can deduct the depreciation of my house, etc?, thank you
The advantage of a single person LLC is that your tax forms are the same as a sole proprietor and that means you can deduct expenses in the same way. If you set up any other type of LLC the forms are different, more difficult to fill out, a tax preparer will charge more to fill them out, and you will lose your house depreciation deduction.
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TomCopeland 08:00 AM 01-08-2020
Originally Posted by Julia2:
How much is home daycare insure 1 million and 4 million to avoid becoming LLC?, were I can get it?, If I have a LLC an a parent suit me, does he suit just my LLC or also my others assets?, as a individual LLC do I have to get another number for my taxes ?, thank you
You can get $1million occurrence and $3 million aggregate insurance from most companies. That's the max. If a parent sues you, you contact your business liability agent and they take care of the rest. They will hire an attorney to respond to the parent's lawsuit. They will either settle and pay out something or decide that the lawsuit if baseless and not pay. All your assets, business and personal, are protected under your policy.
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Unregistered 11:25 AM 02-27-2020
I plan on opening a daycare, I formed an LLC already. The profit margin is projected to he 9%. I want to apply for an SBA loan but the lady at the bank said that I should be a corporation to protect from being sued personally, but I thought that is what the LLC does. I planned on filing my taxes as a sole proprietor, but now I'm wondering if I should form an S corporation. Please help. I have been receiving a ton of conflicting information.
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Michael 11:41 AM 02-27-2020
Originally Posted by Unregistered:
I plan on opening a daycare, I formed an LLC already. The profit margin is projected to he 9%. I want to apply for an SBA loan but the lady at the bank said that I should be a corporation to protect from being sued personally, but I thought that is what the LLC does. I planned on filing my taxes as a sole proprietor, but now I'm wondering if I should form an S corporation. Please help. I have been receiving a ton of conflicting information.
Maybe Tom Copeland chime in here. I believe an LLC can protect you but I started another LLC last year and my accountant had me switch it to an s-corp. Better for taxes and my studio project. I would suggest you speak to your accountant. Sometimes the laws change and what was good last year may not be the best option this year.
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dolores 01:04 PM 02-27-2020
LLC offers some level of protection for personal assets but not 100%. As far as taxes, every year I complain to my accountant about the taxes and every year he tells me to switch to an s-corp, like Michael said. Wish I had done it in the first place.
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TomCopeland 09:50 AM 03-02-2020
Originally Posted by Michael:
Maybe Tom Copeland chime in here. I believe an LLC can protect you but I started another LLC last year and my accountant had me switch it to an s-corp. Better for taxes and my studio project. I would suggest you speak to your accountant. Sometimes the laws change and what was good last year may not be the best option this year.
There are various types of LLCs: single person LLC, partnership LLC, S and C Corp LLC. In all cases they do provide some personal liability protection so I don't know why someone would say you need to do an S Corp LLC to get this protection.
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TomCopeland 09:52 AM 03-02-2020
Originally Posted by dolores:
LLC offers some level of protection for personal assets but not 100%. As far as taxes, every year I complain to my accountant about the taxes and every year he tells me to switch to an s-corp, like Michael said. Wish I had done it in the first place.
Before switching to an S Corp, make sure you understand all the tax consequences. You will lose the ability to depreciate your home. You must set up an "accountable plan" or other process to deduct other house expenses. There are annual costs associated with an S Corp and you may have to pay more in tax preparation fees.
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vlouie574 09:24 PM 03-09-2020
Originally Posted by dolores:
LLC offers some level of protection for personal assets but not 100%. As far as taxes, every year I complain to my accountant about the taxes and every year he tells me to switch to an s-corp, like Michael said. Wish I had done it in the first place.

I thought that way also until I realize many accountants/tax preparers/CPAs don't have an understanding of how home daycare tax preparation works. I've had multiple S corps and LLCs in the past, mostly in retail so I have a good understanding of how S corps work and what I can write off. But it's also a PITA and more costly especially if you've never had a corporation before. But I also knew that my taxes weren't being prepared correctly nor taking advantages of certain deductions home daycares have.

This is what I did. I ended up buying Tom Copeland's books (Tax Workbook & Organizer and Tax Companion.) These to me are the home daycare bibles. Every line of the tax paperwork is broken down in plain english. All the special rules, benefits and deductions that home daycares are allowed by the IRS as a sole prop or single LLC but wouldn't be allowed as a S-Corp. A couple quick examples are The Standard Meal Allowance Rule or Calculating Your Own Time-Space Percentage. Once you understand how it works your going to be like geez why didn't i get these books before.

So why buy the books when you can search all this stuff for "free" on this forum. Because it's not all there. And it gets confusing because different people will give different opinions. With Tom's books I was able to do a mock up of my taxes and bring it in to a tax preparer and tell him/her what I wanted to have deducted instead of me asking them what I could deduct. And when the preparer questioned me on some of the deductions (let's go back to the meal allowance and time-space calculation) I pull out Tom's book and go straight to The Standard Meal Allowance Rule and tell him that I choose to use this method instead of keeping receipts and how i'm keeping track of it. And then i'll go to the part of the book that explains the Exclusive Use Room Rule for the time-space percentage that allows me to take advantage of a much higher percentage explain how I got it and what I need to attach to the tax forms. The person doing the taxes are only going to do what's legal but they're not going to know all the rules. And you can't just tell him "well I read on the internet you can do such and such." You'll need to show proof and facts.

So if you own one home daycare or plan on starting one, I'd say stick to a being a sole proprietor.
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dolores 09:26 AM 03-10-2020
Originally Posted by TomCopeland:
Before switching to an S Corp, make sure you understand all the tax consequences. You will lose the ability to depreciate your home. You must set up an "accountable plan" or other process to deduct other house expenses. There are annual costs associated with an S Corp and you may have to pay more in tax preparation fees.
Thank you Tom . Will bring this up with my accountant.
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dolores 09:41 AM 03-10-2020
Originally Posted by vlouie574:
I thought that way also until I realize many accountants/tax preparers/CPAs don't have an understanding of how home daycare tax preparation works. I've had multiple S corps and LLCs in the past, mostly in retail so I have a good understanding of how S corps work and what I can write off. But it's also a PITA and more costly especially if you've never had a corporation before. But I also knew that my taxes weren't being prepared correctly nor taking advantages of certain deductions home daycares have.

This is what I did. I ended up buying Tom Copeland's books (Tax Workbook & Organizer and Tax Companion.) These to me are the home daycare bibles. Every line of the tax paperwork is broken down in plain english. All the special rules, benefits and deductions that home daycares are allowed by the IRS as a sole prop or single LLC but wouldn't be allowed as a S-Corp. A couple quick examples are The Standard Meal Allowance Rule or Calculating Your Own Time-Space Percentage. Once you understand how it works your going to be like geez why didn't i get these books before.

So why buy the books when you can search all this stuff for "free" on this forum. Because it's not all there. And it gets confusing because different people will give different opinions. With Tom's books I was able to do a mock up of my taxes and bring it in to a tax preparer and tell him/her what I wanted to have deducted instead of me asking them what I could deduct. And when the preparer questioned me on some of the deductions (let's go back to the meal allowance and time-space calculation) I pull out Tom's book and go straight to The Standard Meal Allowance Rule and tell him that I choose to use this method instead of keeping receipts and how i'm keeping track of it. And then i'll go to the part of the book that explains the Exclusive Use Room Rule for the time-space percentage that allows me to take advantage of a much higher percentage explain how I got it and what I need to attach to the tax forms. The person doing the taxes are only going to do what's legal but they're not going to know all the rules. And you can't just tell him "well I read on the internet you can do such and such." You'll need to show proof and facts.

So if you own one home daycare or plan on starting one, I'd say stick to a being a sole proprietor.
I agree with you about becoming knowledgeable about our business from all angles including taxes. Interestingly, I read Tom's books many, many years ago when I started my business and they were very helpful. I need to get current versions of them.

Finding an accountant, and a lawyer, who know the home daycare business and its nuances, tax rules etc is the most challenging part of all of this. It is like looking for a needle in a haystack.
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vlouie574 10:30 AM 03-10-2020
Originally Posted by dolores:
I agree with you about becoming knowledgeable about our business from all angles including taxes. Interestingly, I read Tom's books many, many years ago when I started my business and they were very helpful. I need to get current versions of them.

Finding an accountant, and a lawyer, who know the home daycare business and its nuances, tax rules etc is the most challenging part of all of this. It is like looking for a needle in a haystack.
Your not going to find one that's fully knowledgeable about this type of business and it's not their fault. But then again of course they're gonna tell you to become an S-corp. The tax preparer can charge you more money as a corporation.

That's why having the books is handy. I ended up changing my CPA because he said the same thing..s corp s corp. The new tax preparer is use now (not even a CPA) was impressed because I was showing him things in the books he had no idea about or other things that had special rules just for us. But he verified it all buy looking at the book and verifying on the IRS website. So you really need to find an accountant that is more willing to listen to you and your suggestions vs them telling you what you can or can't do. Because you'll go in brimming with ideas of what you can you deduct versus asking them what you can deduct. It'll make your life and their life easier.

Tom's latest book takes a lot of guesswork out. But every year is different and rereading and getting a refresher once a year for me is not a big deal either. Not everything in the books applies to you so you can skip sections at a time. But certain parts might apply to you the follow year. Example would be spending money on a certain home improvement that qualifies for the Section 179 rule. I have an idea of what it is, and when I'm ready to use it, it'll be there. Until then, i'm skipping it. Pick what you think applies to you, and double check with the accountant.
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Tags:2011, c-corp, llc, s-corp, tom copeland
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