Starting a daycare or child care business involves a particular set of legal considerations. These include choosing the proper business entity, obtaining licenses and permits, dealing with health and safety issues, getting adequate insurance, and dealing with employees.
As we review some of these considerations, keep in mind that the terms “daycare” and “child care,” though not necessarily equivalent, often overlap; both terms are used by many federal and state agencies. For example, the IRS has special tax rules for daycare providers who operate out of their homes, but IRS publications also refer to child care expenses.
Choosing the Business Entity
While you could operate your daycare business as a sole proprietorship or partnership, you should consider using a legal form that protects you from personal liability, such as a limited liability company or corporation. A daycare center may not be the most dangerous business, but you will be taking care of the most precious thing in the lives of your clients: their children. You will be responsible for the health and safety of those children, many of whom may be toddlers, for hours every day. There is always a possibility that a child could be injured while on the premises of your daycare business—in which case you would want the business, not you personally, to be responsible for any liability.
Learn more about choosing a business structure.
Licenses and Permits
Daycare businesses are subject to specific licensing requirements and operating without a license can lead to significant penalties. In most cases, the licensing is handled through a state agency such as a Department of Human Services or Department of Social Services. The information you may be required to provide in applying for a license varies by state, but may include such items as the number and ages of children to be cared for, confirmation that your location meets fire safety requirements (which may involve an inspection), and information regarding whether you or any or your employees has a criminal record. You will also likely be required to pay a license application fee.
Apart from state licensing, you should keep in mind that there may be local zoning laws that would prohibit running a child care business in a particular location. This is more likely to be an issue if you are thinking of operating the business out of your home and you live in a clearly residential, as opposed to commercial, area. Even if a child care center is permissible under the local zoning ordinance, you may be required to obtain a compliance certificate from the local zoning authority. In short, your best bet is to investigate zoning regulations before you open for business.
Health and Safety
While federal law has general requirements regarding the health and safety of children in child care settings relating to such matters as building safety, employee training, and disease prevention, it is largely left to the individual states to set their own specific regulations. State agencies often publish long lists of such regulations for child care centers. Some regulations may vary depending on whether the daycare operation is located in a home or a separate center. Among the items that may be regulated by your state are:
There generally are also requirements that you report to proper authorities known problems or issues as they may arise. These may include children needing medical treatment, going missing from the center, or other unusual incidents threatening the physical or emotional health of a child.
State agencies also have the authority to make inspections of your operation. These inspections may be unannounced and may include interviews of children and staff. Similarly, a fire marshal or other fire prevention official may inspect to ensure there are adequate routes of escape in case of fire.
If you run your daycare business out of your home, you may be able to deduct expenses for the business. To qualify, you must (a) provide daycare to children and (b) be licensed by the state or exempt from the state’s licensing requirement. Details about how to figure the deduction can be found on IRS Publication 587, available at irs.gov.
There are particular risks associated with operating a child care center, primarily those related to the health and safety of infants and small children. These are on top of more generic business risks such as fire, theft, or other sources of property damage or personal injury.
Try to work with an insurance agent who has previous experience writing policies for child care providers. Consider coverage for sexual abuse or molestation, for corporal punishment, and for employees who are child care providers. In general, make sure you have an excellent general liability policy.
For more information, see Nolo's article on Obtaining Business Insurance.
Most daycare centers have employees and, in many cases, there can be relatively frequent turnover. You should inform yourself about basic employment law issues such as illegal discrimination, workers compensation, and how to handle the hiring process. With regard to hiring in particular, learn how to:
Keep in mind that there are some employment laws that are specifically relevant to daycare workers, such as state training requirements and rules relating to criminal records.
A good resource for general employment issues is The Employer’s Legal Handbook, by Fred Steingold (Nolo). Also, many key employment laws are administered through the Department of Labor, and there are a variety of informative webpages within the Department of Labor website.