Should I open my own day care as a sole proprietorship or corporation?

Should I open my own day care as a sole proprietorship or corporation?

by Susan E. S. Howe, CPA | Oct 17, 2017

I'm opening my own day care business. Which is a better business type: sole proprietorship or corporation? Which has better tax benefits and legal protection over my personal assets?

There are advantages and disadvantages to each type of business structure. From a tax reporting standpoint, an unincorporated sole proprietorship is simpler, because a separate tax return is not needed and you do not need to file articles of incorporation with the state to form a separate corporate entity. The income and expenses of your business are reported on your personal tax return, and the net income is taxed at your marginal rates. However, if you have employees or will need to give the tax identification number of the business to clients, it's best to file for a tax identification number that is separate from your Social Security number. That's not a complicated process, and it can be done without incorporating.

Incorporating means more compliance costs, as a separate return is required and accounting needs to be kept separate from your personal finances (although it's good practice to keep accounting separate even for an unincorporated business). However, if the corporation is formed as a single-member limited liability corporation (LLC), it is still possible to handle the tax reporting on a Schedule C attached to your Form 1040 rather than having to file a separate federal income tax return. You may need to file a separate state return, however, depending on the state. Generally speaking, incorporating will provide you with more protection from personal liability, and in a business with high potential liability it is worth considering. Note, even incorporating can't protect you in the case of reckless or willful misconduct, but in general incorporating your business will give your personal assets more protection.

If you incorporate as a C corporation, a separate tax return is required, the business will pay taxes at corporate tax rates, and the accounting for the business must be completely separate from your own. However, this type of entity generally does present the most complete protection of personal assets. Depending on the level of net income, tax may be more or less than it would be if the business is reported and taxed on a personal income tax return.

Making the best choice can be confusing, so it's best to consult with a CPA or attorney who specializes in helping clients with small business matters.
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Susan E. S. Howe, CPA, is principal of Howe Advisory in Strafford, Pa.
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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