Business Structure

The business structure is defined as the way a business is organized. It identifies who owns the company, how profits are distributed and which managers perform what jobs.

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In the United States, the three business structures recognized by the IRS are: Sole Proprietorship, Partnership, and Corporation. Other structures that are legally important (but not for tax purposes) include: Limited Liability Company, S-Corporation, and C-Corporation.

Tax treatment and risk management are the primary concerns in selecting a business structure. Generally, for family childcare providers there are no significant savings to forming an LLC or partnership.

Personal liability protection obtained from LLC, partnership or corporation structures do not offer 100% security. Should a provider be negligent and a child is injured, or if the provider is accused of child abuse he/she will not necessarily be protected.

Resources and Links:

Business Structure. (n.d.) Farlex Financial Dictionary. (2012). Retrieved December 15 2016

Selecting a Business Structure: Sole Proprietorship

The main factors driving the decision to select a business structure are a liability of owners and tax treatment. Another significant consideration is the ease of establishing and, more importantly, maintaining the business structure. A provider’s inability to comply with legally mandated procedures can result in loss of personal liability protection.

Liability of Owners

Sole Proprietorship – In a Sole Proprietorship, the owner has unlimited liability for obligations related to the business.

Insurance

Sole Proprietorship – The childcare business can be risky: A parent may suffer an injury in the provider’s home while dropping off or picking up a child; a child may suffer an injury while in the provider’s care; and the provider, an employee or family member may be accused of negligence or abuse. For a sole proprietor, the most effective way to protect personal assets (e.g. house, bank account, or other) is to obtain proper insurance coverage.

Tax Treatment

Sole Proprietor – A Sole Proprietorship is not taxed: all income and losses pass through to the owner. Owners report all income and/or losses and expenses with a Schedule C and the standard Form 1040. The “bottom-line amount” from Schedule C transfers to the owner’s personal tax return. It’s the owner’s responsibility to withhold and pay all income taxes, including self-employment and estimated. More information on taxes here.

Ease of Establishing & Maintaining

Sole Proprietorship – A Sole Proprietorship is the easiest business structure to establish and maintain. A sole proprietor can open and operate without any formal organizing or operating procedures. While no filing with the state is required, all appropriate licenses/registrations must be obtained. Also, should the sole proprietor want to operate using a name that is not the sole proprietor’s legal name, the law requires that a DBA/Business Certificate be filed with the respective County Clerk’s Office.

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Setting Up a Sole Proprietorship

There are no formal steps for the establishment of a Sole Proprietorship. If a person is conducting business (trading of services and/or goods), he/ she is a sole proprietor. If the business activity being conducted requires licenses and/or permits, the sole proprietor is responsible for obtaining these.

Someone interested in becoming a family child care provider under the Sole Proprietorship business structure would only need to obtain his or her family childcare registration/license. Learn more about the New York State registration/licensing process here.

If a family childcare provider operates using his/ her legal name, no further formal/ legal steps are required. Should the family childcare provider operate using a name other than his/ her legal name (e.g. a “fictitious name) for business purposes, then the law requires the filing of an Assumed Name Certificate Assumed Name Certificate / Business Certificate (aka DBA) at the County Clerk’s Office where business is conducted. Failing to file can have unwanted consequences.

(Note: Corporation, Limited Partnership, or Limited Liability Company entities file the Assume Name Certificate with the New York State Department of State.)

Selecting a Business Structure: Limited Liability Corporation

The main factors driving the decision to select a business structure are a liability of owner and tax treatment. Another significant consideration is the ease of establishing and, more importantly, maintaining the business structure. A provider’s inability to comply with legally mandated procedures could result in loss of personal liability protection.

Liability of Owners

Limited Liability Corporation – In a Limited Liability Corporation, generally, members (owners) have no personal liability for obligations related to the business.

Insurance

Limited Liability Corporation or S Corporations – Owners of a Limited Liability Corporation or an S Corporation possess personal liability protection. Nevertheless, small closely-held businesses are challenged to demonstrate that they are separate and apart from the owner (members). A family childcare business would very likely fall into this category. Furthermore, if a court rules that an “egregious situation,” such as negligence exists then the “veil” of liability protection could be lifted. This is why it is critical that owners of limited liability companies and S Corporations have high enough insurance coverage.

Tax Treatment

Limited Liability Corporation – A Limited Liability Corporation entity is not taxed: all income and losses pass through to members (owners). It is extremely important that personal funds are not intermingled with corporate funds, otherwise, shareholders (owners) risk losing their personal liability protection. As a home-based business, family childcare service providers may be particularly challenged to demonstrate that the business is separate and apart from the owner (member.)

Ease of Establishing & Maintaining

Limited Liability Corporation (LLC) – A Limited Liability Corporation must file an Article of Organization with the Secretary of State. It is highly recommended that an Operating Agreement is drafted, even in the instance of a single member-LLC. In New York State the filing fee is $200. The state also requires that a copy of the Articles of Organization or a notice be published in two newspapers for six consecutive weeks, adding to the costs of set-up. Additional costs include a $50 filing fee for a Certificate of Publication as well as lawyer fees. A lawyer is not required but highly advised.

Resources and Links:

Selecting a Business Structure: S Corporation

The main factors driving the decision to select an S Corporation business structure are a liability of owners and tax treatment. Another significant consideration is the ease of establishing and, more importantly, maintaining the business structure. A provider’s inability to comply with legally mandated procedures could result in loss of personal liability protection.

Liability of Owners

S Corporations – S Corporations shareholders (owners) have no personal liability for obligations of the business.

Insurance

Limited Liability Corporation or S Corporations –Generally, owners of a limited liability corporation or an S Corporation possess personal liability protection. Nevertheless, small closely-held businesses are challenged to demonstrate that they are separate and apart from the owner (members). A family childcare business would very likely fall into the category of small closely-held businesses. Furthermore, if a court rules that an “egregious situation,” such as negligence, exists the “veil” of liability protection could be lifted. Therefore, owners of Limited Liability companies and S Corporations should have high enough insurance coverage.

Tax Treatment

S Corporation – An S Corporation entity is not taxed: all income and losses pass through to shareholders (owners). It is extremely important that personal funds are not intermingled with corporate funds, otherwise, shareholders (owners) risk losing their personal liability protection.

Ease of Establishing & Maintaining

S Corporation – The Article of Organization must file in order to be created. These entities must hold director and shareholder meetings, the minutes of these meetings need to be recorded, and the board of directors is obligated to approve major business transactions. If these procedures are not maintained, the shareholders (owners) risk losing their personal liability protection.

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S Corporation: Can an Owner Be an Employee?

An S Corporation shareholder may be an employee of the corporation. The S corporation must determine and report an appropriate and reasonable salary for that shareholder-employee. The shareholder-employee, in turn, reports this compensation as wages on tax forms.

These payments are subject to employment taxes. The S Corporation is obligated to pay social security tax, Medicare tax, and federal unemployment insurance. In New York State an S Corporation also pays state unemployment insurance and is responsible for withholding the proper amount of income tax from payments to the shareholder-employee.

Health and accident insurance premiums paid on behalf of a greater than 2-percent S Corporation shareholder-employee are deductible by the S Corporation, reported as wages on the shareholder employee’s Form W-2, and subject to income tax withholding.

Learn more about employer responsibilities here.

Even if a shareholder does not consider himself/ herself an employee, according to the IRS: “When corporate officers perform a service for the corporation and receive or are entitled to payments, those payments are considered wages.” This also applies even when shareholders take distributions, dividends or other forms of compensation instead of wages.

If an officer does not perform any services, or only performs minor services and is not entitled to compensation, then the officer is not considered an employee.

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