Should I Start an LLC for My Nanny Referral Business?

Starting a limited liability company (LLC) for your nanny referral agency 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 nanny referral agency, lawsuits can arise from things like negligent referrals (e.g., failure to properly vet a nanny before referral) and negligent retention (e.g., an employee ignoring issues with a nanny and referring her to a client anyway).

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

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

Do I Need an LLC for a Nanny Referral Business?

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

You should start 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 Nanny Referral Business

By starting an LLC for your nanny referral business, 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.

Nanny referral businesses will benefit from liability protection because of the risk of professional liability for theft, security breaches, and personal data breaches.

Example 1: Your nanny referral agency is sued by a nanny who claims you owe her money. You do not. The amount deducted from her wages is the contractual placement fee. In the unlikely event she wins in court, only your business assets would be on the hook. Your personal assets are shielded from such lawsuits.

Example 2: Your nanny referral agency misses several months of payment on a vehicle loan and the lender commences legal action. A judgment in its favor will allow the lender to garner your business bank account, but not your personal bank account, since your personal assets are protected.

Example 3: You decide to close your nanny referral business to open a language school. Unfortunately, your business assets are inadequate to pay off all creditors. Nevertheless, the creditors cannot go after your personal assets, since they enjoy the limited liability protection of your LLC.

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 Nanny Referral Business

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 nanny referral business 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

Nanny referral businesses 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 loans, grants, 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?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

A nanny referral agency needs general liability insurance which covers a variety of risks, including damage to property, physical injury, and personal injury.

Common Situations Business Insurance May Cover for a Nanny Referral Agency

Example 1: Your agency recommends a nanny to a family with a newborn baby. The nanny is hired, but one day she slips and falls while carrying the infant. In the event that the baby is seriously injured and your agency is found liable, you would likely be covered through general liability insurance for damages owed or settlements reached.

Example 2: A nanny you connect with a family is hired, and she admires a very expensive vintage typewriter in the client’s home office while the children are napping. She picks it up to move it to a room with better lighting and drops it on the floor. In the event that your company is found liable, general liability insurance could probably help to cover some of the damage you owe.

Example 3: A nanny is hired through your agency and does very well over the course of a couple of years. However, during her employment, she is found to have been filling the family’s car with a low-octane fuel that is not meant for that vehicle. Over time, this leads to badly damaged internal components in the car, requiring thousands of dollars of repairs. If found liable, your business would likely be covered by general liability insurance to assist with damages owed for the vehicle.

Other Types of Coverage Nanny Referral Agencies 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 nanny referral agencies should obtain.

Commercial Auto Insurance

Since you will be driving your business vehicle on public roadways, you are mandated by the state to carry a commercial auto policy. Auto insurance protects not only your vehicle but any liability you may have in an accident. Your personal car insurance will not cover you if you are driving the agency vehicle, even if you are off duty.

Commercial Property Insurance

If you own your location instead of renting, you need commercial property insurance to protect the building. If your business is based out of your home, your homeowners' insurance will not cover the home when it is being used for commercial purposes. Property insurance also covers items owned by your business.

Nanny referral agencies invest heavily in the equipment that is used to complete their work. Be sure that you have enough coverage to replace all of your tools in the case of a loss.

This coverage is generally offered in a Business Owner Policy (BOP).

In addition to the policies outlined above, there are a few other types of coverage your nanny referral agency may require depending on certain aspects of your operations. Some of these might not apply to you, so be sure to ask your agent which policies are right for your business.

Workers' Compensation Insurance

If your nanny referral agency has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees in the case that they get injured on the job.

Read more about workers’ compensation insurance.

Business Interruption Insurance

In the event of a fire, flood, or other catastrophes, there is a good chance your business operations will be halted for some time. Business interruption coverage is designed to help you recoup a portion of the revenue your business would lose due to the inability to operate.

This type of insurance is typically included in a business owner’s policy.

Commercial Umbrella Insurance

Umbrella coverage allows you to extend above and beyond the standard limits of your other business insurance policies. If you are faced with a large lawsuit or other claim situation, there’s a possibility that the coverage limits of your standard policies will be insufficient. In this case, your umbrella policy will allow you to surpass these limits.

Should I Start an LLC FAQ

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.

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

Read our Nanny Referral Business Insurance article for more info.

Since a nanny referral agency is a service business, startup costs are minimal, especially if the agency will be based at home. You’ll need to set up a website and have a computer. Similarly, ongoing costs will be low, made up of utilities, website marketing, and commercial insurance.

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

Ongoing expenses of running a nanny referral business include insurance, marketing, office supplies, and access to security databases.

Learn more about running a nanny referral business.

Nanny referral businesses make money by charging families a flat fee based on the percentage of the negotiated salary for the nanny or charging a flat service fee for short-term placements.

Learn more about starting a nanny referral business.

According to Care.com, the national average of weekly child care costs has increased by at least 20% in the last six years. Nanny referral services bear the burden of the vetting process for parents hiring child care.

Profit margins for nanny referral businesses can be as high as 50%.

Learn more about starting a nanny referral business.