Should I Start an LLC for My Daycare?

Starting a limited liability company (LLC) for your daycare can provide several benefits. 

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a daycare, lawsuits can arise from things like an employee negligently leaving a child alone during working hours or a customer’s child accidentally getting injured within your daycare.  

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your daycare seem more credible. 

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Daycare?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Daycare

By starting an LLC for your daycare, you can:

  • Protect your savings, car, and house with limited liability protection
  • Have more tax benefits and options
  • Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Daycares will benefit from liability protection because of the physical risks involved with taking care of children. 

Example 1: When a four-year-old child breaks her leg during one of your daycare’s activities, her parents file a negligence lawsuit against you, seeking compensation and damages. Here, your personal assets will remain safe as long as it wasn’t your personal act that caused the harm.

Example 2: A lawsuit is filed asserting claims of negligence against your daycare after a 12-month-old infant was left alone for hours at a time. Assuming this was a result of your employee’s negligence rather than your own, limited liability will ensure that you cannot be found personally liable for compensating the claimant.

Example 3: When a toddler is accidentally locked inside your daycare without supervision by one of your employees, a negligence lawsuit is filed against you. Since you didn’t personally act negligently, your business’s LLC classification will ensure that your personal assets are protected, regardless of the validity of the lawsuit.

Example 4: During outdoor recess, a toddler climbs to the top of the jungle gym, falls, and breaks their arm. Their parents sue your daycare, asking you to pay a settlement and medical expenses. 

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Daycare

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return. 

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform. 

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a daycare owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Daycares rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loansgrants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

  • You can hire a professional LLC formation service to set up your LLC for a small fee
  • Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Yes. LLCs need insurance even though they have limited liability for two reasons:

  • Limited liability does not protect the business’s assets, only the owners’. 
  • Limited liability does not protect the owners’ personal assets from negligent acts they personally commit.

Note: You may be required to purchase some forms of insurance by law. Most states, for example, require LLCs to get workers’ compensation insurance if they hire employees. 

Common Situations Business Insurance May Cover for a Daycare

Example 1: After a parent drops their child off at daycare, the child becomes upset and runs into some glass doors with a toy in their hand. The impact causes the glass to shatter and leaves the child cut badly enough to receive stitches. General liability coverage will likely cover any damages involved in a lawsuit.

Example 2: A new family is touring your daycare after hours, and one of the parents slips and falls on the freshly cleaned floors. With general liability insurance, you can protect your business and pay for any damages if you are sued.

Example 3: During outdoor recess, a toddler manages to climb to the top of the jungle gym unnoticed by a caregiver. While playing, they fall from the top of the structure and break an arm. Your general liability insurance will likely cover their associated medical bills and any other damages.

Other Types of Coverage Daycares Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all daycares should obtain:

Commercial Auto Insurance

Your personal car insurance will not cover any accidents or situations where a work vehicle causes property damage to another car on the road. Commercial auto insurance is necessary for any cars that are used for business purposes.

Workers’ Compensation Insurance

If one of your employees becomes injured or ill on the job, workers’ compensation insurance can help to cover their medical bills and lost wages. This type of insurance is required in most states for any business that employs part-time or full-time workers.

Home-Based Business Insurance

If you operate your daycare from your home, your homeowner's insurance policy may not cover accidents that are related to your business. A home-based business insurance policy can be tailored to meet your specific needs and provides an extra layer of protection for your home in the event of an accident or lawsuit.

Commercial Umbrella Insurance

Operating a business involving the care of small children comes with a variety of different risks, and the liability expenses associated with a lawsuit could very well exhaust your primary policy limits. With the help of commercial umbrella insurance, you can rest easy knowing you have an extra layer of protection in the event that the damages associated with a lawsuit exceed the limits of your primary policies.

Should I Start an LLC FAQ

Which is better for my daycare — an LLC or sole proprietorship?

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

What type of insurance does a daycare need?

At a minimum, you’ll need general liability insurance.

Read our Business Insurance for Daycares article for more info.

What are the costs to start and maintain a daycare?

You can start a daycare from your home if you have a relatively small budget. In this case, you’ll only need to purchase food, educational and marketing materials, and business insurance.

Generally speaking, you can start this type of small daycare for around $1,000 to $4,000. Of course, if you plan to open your own commercial daycare center, the total cost will be much higher.

Visit our How to Start a Daycare guide to learn more about the costs of starting and maintaining this business.

What are the ongoing expenses of running a daycare?

Some typical operating expenses for daycares might include payroll, insurance, and rent.

Learn more about running a daycare.

How do daycares make money?

A daycare’s profit typically comes from charging an hourly or monthly rate for their childcare services.

Learn more about starting a daycare.

Is a daycare lucrative?

Many parents are willing to pay top dollar for quality care for their children, making this a potentially profitable business. Owners of smaller daycares can make around $50,000 each year. Additionally, there is the option to open a daycare out of your home or to rent a commercial space, making this a suitable business for owners with various budgets.

Learn more about starting a daycare.

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