Building a business
What’s your organization’s legal structure?
Are you applying for the director’s job at the new child care program?” asks a friend.
“Yes,” Elizabeth says. “I’ve been studying the company’s website so that I’ll know about its goals and philosophy, but I haven’t found out about its legal structure yet.”
“Why would you need to know that?” the friend asks.
“So I’ll be able to communicate with other business professionals, like accountants and bankers,” says Elizabeth. “And I want to know our legal rights and responsibilities.”
Elizabeth is right. Understanding a program’s legal structure is part of competent leadership.
Legal structure falls into two broad categories: nonprofit and for-profit.
Nonprofit programs are corporations that meet the requirements of Section 501(c)3 of the Internal Revenue Code. Its main characteristic is that it is organized for charitable purposes. It’s exempt from most state and federal taxes, but it still must file a tax return. In addition, it must pay payroll taxes on employees.
A nonprofit child care program may charge fees to parents for services, and it is eligible for grants from foundations, businesses, and government agencies. Any leftover revenue, or profit, must be reinvested in the organization. Like other corporations, it’s governed by a board of directors that meets regularly to review progress. Board members are volunteers.
A for-profit organization, as the name implies, aims to make money. Caring for children may sound charitable in that it fulfills a community and family purpose, but in a business sense, it exists to earn a profit.
Sole proprietor. This is the simplest legal structure and is typically used by in-home child care operators. A sole proprietor is the only owner of the business and has complete control of all decisions. Her Social Security number may serve as her IRS Employer Identification Number (also known as Tax ID), and business income and losses are reported on her personal income tax return.
A sole proprietor ideally will have a business bank account for the child care operation in addition to her personal account. A separate business account makes it easier to keep track of receipts from parents and expenses for food and supplies for the children.
Partnership. Two or more persons operating a child care business may form a partnership. The entity may be a general partnership, in which partners jointly own the business, manage it, and are responsible for debts. A limited partnership, on the other hand, has both general partners and limited partners. Limited partners serve as investors only. They have no role in managing the business and are not responsible for its liabilities.
Ideally, a partnership will operate according to an agreement that spells out the responsibilities of each partner and how decisions are made.
A partnership doesn’t pay taxes but must file a report with IRS on its profit and loss activity. This entity passes through any profits or losses to the partners, who report their individual share of profit when they file their tax returns.
Corporation. A group of people (shareholders) may buy stock in a child care business and form a corporation. Shareholders elect directors who then choose officers, such as president and treasurer. The officers make the business decisions, but they and shareholders are not personally responsible for liabilities. In other words, creditors can collect only from corporate assets, not the personal assets of shareholders.
A principal characteristic of a corporation is that it is legally viewed as a separate entity from its owners. Unlike a sole proprietorship or partnership, a corporation must pay income taxes on its profits. Shareholders pay taxes only on dividends the corporation may distribute. If shareholders also work for the corporation, which may be the case in a small business, they pay income taxes on their salaries just as regular employees do.
Small businesses might prefer a special form of corporation, called a Sub S, which allows it to pass through taxes to its owners, much like a partnership. The corporation, however, is still responsible for liabilities.
Limited liability company, or LLC. This structure is a hybrid of a partnership and a corporation. It operates like a partnership but its members are protected from personal responsibility for the company’s liabilities. Members can participate in managing the company to the extent specified in an operating agreement.
The LLC itself does not pay taxes on profits. It passes through profits to members, who pay taxes on their share of profits on their personal income tax returns.
An LLC can consist of a single member. In that case, the IRS treats the company as a sole proprietorship. Multi-owner LLCs are treated as partnerships.
Get liability coverage
Forming a corporation or LLC does not guarantee protection of your personal assets. If a child is injured or an employee is accused of child abuse, for example, you or an employee may be sued and ordered to pay damages. For that reason, it’s wise to buy liability insurance for risks associated with caring for children.
A good general liability policy will also cover other business risks such as fire, theft, and property damage.
Editor’s note: This article is intended for information only. For guidance, seek the advice of an attorney or CPA who can address your individual situation and explore options that best meet your needs.
For the grocery list: Sugar labeling delayed
July 2018 was the original deadline the Food and Drug Administration gave packaged food makers to specify added sugar to nutrition labels. Now the deadline is 2020 for big companies and 2021 for small companies.
What does this mean for you?
You’ll need to read food labels on packaged foods carefully and avoid any that contain the following sugar ingredients:
confectioners’ or powdered sugar
high-fructose corn syrup (HFCS)
Avoiding these sugars is especially important if children or staff have diabetes or are on the verge of becoming diabetic. Added sugars raise the blood glucose level and contribute to diabetes and even cognitive decline.
A simpler way to avoid these added sugars is to avoid buying packaged foods; give preference to fresh and frozen fruits and vegetables.
CDA credential: 10 reasons for requiring it
The CDA (Child Development Associate) is a national credential for people who work in early childhood education. First awarded in 1975, the CDA was designed as a way to train and recognize high quality caregivers and teachers of young children.
The credential is based on the competencies needed to nurture the physical, cognitive, emotional, and social development of children from birth to age 5. The CDA is available for those who work in three types of programs: home, center, and home visitor.
A CDA is often a minimum job requirement in early childhood education. More than 420,000 educators have received the credential to date.
10 reasons to require your staff to earn a CDA:
It affirms your commitment to quality care and education for children.
It provides parents more peace of mind about the safety and care of their children.
Regulators feel more comfortable about your program’s compliance with standards.
The training can enable candidates to alert you to the latest research in the field.
Earning the credential opens a candidate’s eyes to the wider education community.
Individual staff feel more confident and satisfied with their jobs.
CDAs serve as role models for less well trained staff and students.
Efficiency improves—both for the credentialed teacher and the program.
Your program becomes more economically competitive in the community.
A credential improves opportunities for a CDA’s career to advance.
For more information, see the website of the Council for Professional Recognition, which administers the CDA program, at www.cdacouncil.org/about/cda-credential.