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Staring a daycare business can be a confusing process. Should you become sole proprietor of your daycare business? Should you incorporate your daycare business? How do you incorporate your business? These are some questions to ask yourself before you begin the daycare licensing process. Susan Cooper, M.Ed, and member of the non-profit Applied Scholastics International explains daycare business models and describes the benefits of sole proprietorship and partnership for daycare business owners.

OwnADaycare: What is sole proprietorship? What are the first steps in becoming sole proprietor of a daycare center?
Susan Cooper: A sole proprietorship just means that there is only one (sole) owner of the business. In a daycare center that would be the responsible party even though many duties are delegated to others. In California, the owner of a daycare center is required to state who the delegated person is to act on behalf of the owner or sole proprietor. This in no way relieves the sole proprietor of his/her responsibilities.

OwnADaycare: What are the first steps necessary for incorporating a daycare business?
Susan Cooper: The first steps to incorporation of a daycare business are the same as any other business. It’s best to check with a State agency to see what is required. In California, the first step is choosing a name that is available by checking with the Secretary of State. Then the next step is filing the correct paperwork with the Secretary of State, such as the Articles of Incorporation. Then hold your first Corporate Organizational Meeting and adopt the company’s Bylaws. Get a Federal Employer Identification Number from the IRS, also called a FEIN. Get a business license from the city or county. Submit a Corporation Statement of Information. Then start the process of applying to the State agency that licenses daycare centers. In California, that agency is Community Care Licensing.

OwnADaycare: What are the advantages of sole proprietorship for daycare center owners?
Susan Cooper: The advantages of sole proprietorship for a daycare center are that you can control the overall philosophy of the program, the policies and procedures of the operation, and the methodology used by the teachers towards educating and instructing the children.

OwnADaycare: What are the advantages of partnership for daycare centers?
Susan Cooper: The advantage of a partnership for a daycare center is that you can have the input from other experts in formulating the policies and procedures of the operation, in adopting a philosophy for the program, and in creating methodology that teachers will use in the classrooms.

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Partnership and sole proprietorship are simple forms of business ownership that are ideal for small businesses like a daycare center. But before making any decision of which ownership model you are going to choose for your business, it is necessary first to understand what the advantages and disadvantages each business type has.

Sole proprietorship is a type of business entity that has no separate existence from the owner hence the limitations of liability that are normally enjoyed by corporations do not apply. This means that all debts incurred by the daycare center are debts also of the owner because the owner of the daycare center has sole responsibility for the debts of the business. Sole proprietorship therefore refers to a natural person (as differential from a juridical person in a corporation) operating a daycare center business in his own name and in which there is only one owner. The sole proprietor of the daycare center pays personal income taxes on the profits realized from the operation of the business.

A partnership, on the other hand, is a business entity type where partners or owners share with each other the profits or losses of the business operations in which all have made their investments. Partnership can either be general partnership or private limited partnership. In general partnership, the partners and the daycare center are not considered to have separate legal entities. This means that all partners are severally liable for all the debts incurred by the operation of the daycare center. If the daycare center cannot pay off its debts, the partners then are liable to pay off the debts with their own personal assets. Private limited partnership allows the partners and the daycare center to be considered separate legal entities; the partners are not required to pay off the daycare center’s debts with their personal assets. The limited partners, however, are required to deposit and maintain an amount of money in the bank as a guarantee for its operations. Limited partners then get better credit terms than general partners because of such forced deposit.

In the aspect of management, a sole proprietorship is easier to run because the sole owner is free to do whatever he deems necessary for his daycare business whereas the owners in a partnership must share the decision making process. The sole proprietor needs to undertake all the costs, risks, and responsibilities all my himself while in a partnership, everything is equally shared by all the partners who are also the bosses of the business, requiring that the day to day decisions must be by general consensus.

Any business model is the best model as long as it is run effectively by either the sole proprietor or by the business partners. A business owner may enjoy the freedom that goes with sole proprietorship while other business owners feel very much secured in their number in a partnership. Your choice of business model will depend on your personal preferences as to resources and risk in running your daycare center.

See: How to start a daycare center

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