a woman that started a daycare business talking with small four children
ComplianceApril 20, 2022

How to start a daycare business

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Thanks to a growing demand for early childhood education, parents returning to the physical workplace post-pandemic, and the need for two incomes to make ends meet, the child daycare business is booming.

Childcare can be a rewarding career. It provides business owners the opportunity to support families and have an impact on children’s lives. But it can also be challenging. Success in this business requires dedication, patience, and long hours.

If you’re interested in starting a daycare business, here are some things to consider.

Learn about daycare legal requirements

Childcare is a heavily regulated business. To care for children, licensed providers must complete child health and safety classes. In addition, many states require that providers have a bachelor’s degree and have earned a Child Development Associate (CDA) credential.

Daycare centers are also subject to oversight. While laws vary from state to state, generally they limit the ratio of adults to children and enforce strict recordkeeping and other policies.

Decide which type of daycare business you want to run

Definitions of childcare businesses can vary according to individual state licensing regulations. But as a rule, the types of business fall into the following categories:

  • Childcare centers: These non-residential facilities typically provide care for children in classroom settings according to age group. Your state will provide guidance on the types of childcare centers that meet licensing requirements, such as the minimum number of children and hours that the facility can operate and whether a license is required.

  • Family childcare (FCC): This form of business operates in a residential/home setting and comprises a small number of children of mixed ages under the care of a single provider or a provider and an assistant. Licensing requirements vary depending on the number of children being cared for (many states require a license if one of the children or a family of children being cared for is unrelated to the homeowner, while others do not).

Write your daycare business plan

To ensure your daycare business is a success, you need a business plan. A well-thought-out plan can guide your strategy, identify risks, and help you secure funding to expand and grow your enterprise.

Here’s a suggested outline for your daycare business plan:

  • Executive summary: A brief overview of your business and why it will be successful
  • Company description: Include detailed information about your business and explain your competitive advantages. Be sure to include information about the type of childcare services you will offer, what your curriculum will be, and your experience in the business.
  • Organization and management: Explain how your company will be structured and who will run it. For example, will it be a partnership, LLC, or S corporation? Who will be responsible for day-to-day management?
  • Market analysis: What is the industry outlook? Who are your target customers? What competition are you up against?
  • Financing plan: Describe your funding requirements, and include detailed financial statements and a financial statement analysis.
  • Marketing strategy: Outline strategies to promote your business and to keep customers coming back.

Many states offer resources and guides to help entrepreneurs develop a daycare business plan and launch a successful business.

Pick a business structure

Your choice of business structure – whether it’s a limited liability company (LLC), corporation, or partnership – will impact your daily operations, taxes, and the amount of risk you’re willing to take with your personal assets. Choose a structure that balances legal protections and benefits.

The four most common are:

  • Sole proprietorship: This means that the business is owned and run by one person with no legal distinction between the owner and the business.
  • General partnership: A general partnership is the simplest variety of partnerships and is created automatically when two or more persons engage in a business enterprise for profit. No state filing is required.
  • Limited liability company (LLC): This is one of the most popular forms of business entity for small businesses. An LLC offers limited liability protection (shielding your personal assets by protecting them from debts and liabilities associated with the company) and pass-through taxation.
  • Corporation: A corporation is a separate legal entity owned by its shareholders, thereby protecting owners from personal liability for corporate debts and obligations.

Choosing a legal structure for your daycare business is important, particularly if you plan to borrow money to start your business. Many entrepreneurs don't consider the relevance of a business structure until they are asked about it their loan or license application.

For more information on business entity structures, read Comparing company types.

Choose a business name

Naming your daycare business may not be as simple as it seems. When selecting a name, try to make the name short, easy to remember, descriptive of the business, and attention grabbing. Depending on the business form you choose, you may have to register and/or receive approval from the local or state government where your business is formed.

For more information on naming rules for different entity types, read Naming your startup business.

Register your business

Based on your location and business structure, you may need to register your daycare business with your state and/or local government.

To do this, LLCs, corporations, and general partnerships must register (online or through the mail) with the Secretary of State or business agency where they conduct business.

Importantly, if you choose to operate your business under a name other than your personal name (even if you are a sole proprietor), you will need to register that business name with state and/or local governments a process known as filing a “doing business as” (DBA) name.

Get federal and state tax IDs

Before you can pay business taxes, you may need to register your business with the IRS and obtain an employee identification number (EIN). An EIN is the equivalent of a social security number for your business and is required on your state and federal tax filings. (Note: If you’re a sole proprietor without employees, then you don’t need an EIN. Instead, you will file your taxes using your social security number.)

An EIN is also needed to open a business bank account and ensure the separation of your business and personal finances.
You may also require a state tax ID. Typically, you’ll need to get an EIN before you apply for your state tax ID. Check with your state or a business lawyer, as the process will vary by state.

Research tax credits

As the owner of a daycare business, you may be eligible for a tax deduction related to the space used for a business purpose. Talk to a tax advisor to find out what types of space qualify — it may be your basement or living room — and take advantage of this cost-saving tax benefit.

Find a location for your daycare business

Be sure to check zoning laws before your purchase, rent, or dedicate a space for childcare. If the laws or covenants prohibit childcare businesses in your location, you can’t open a business without an exception.

If you plan to open your daycare business in a residential area, check your deeds and HOA agreement to see if there are any restrictions.

If you buy into a daycare franchise, be sure to check with the franchisor to see if there are specific guidelines about where you should locate your business.

Obtain licenses and permits for your daycare business

To open a daycare business, you’ll need to obtain a childcare license. This will show that you have met the minimum acceptable standards for child health and safety. The application process is rigorous and can be prolonged as the issuing authority conducts its investigation into your background, experience, and the condition of your facility. Some states will require more detailed information, such as compliance with building codes, zoning laws, and health inspection requirements. You may also need to provide details of your programs, activities, menu, and evacuation plan.

Once you receive a license, you must ensure ongoing compliance and renewal. Each state monitors licenses differently but you can expect regular inspections by a regulator agent and investigation of any complaints.

Note: It is illegal to operate an unlicensed daycare facility, and fines can be as high as $300 per day for non-compliance.

Other licenses and permits you may need include:

  • Basic business operation license: A license from the city in which your business will operate, or from the local county (if the business will be operated outside of the city's legal boundaries).
  • Zoning and land use permits: Local government zoning laws may prohibit certain business activity in designated areas.
  • Building permit: If you plan on remodeling or building a commercial space, you'll need to get a building permit.
  • Certificate of Occupancy: This outlines what the building structure is used for and ensures it is compliant with building codes.

Get insurance for your daycare business

Daycare business insurance requirements vary by state. Contact the state childcare licensing agency in your state to understand what insurance you will need.

Typically, you are required to obtain the following:

  • Business owner’s insurance: This combines general liability (which protects against bodily injury or property damage) and property insurance (covers equipment) and can be less expensive than purchasing each policy separately.
  • Professional liability insurance: This insures you and your staff for any losses incurred due to negligence.
  • Workers’ compensation insurance: Required by many states and covers benefits should an employee be injured while working.

Note: Homeowner’s or renter’s insurance policies don’t provide liability coverage for a family childcare business. Furthermore, if you rent your home, you may need to list your landlord on your business liability policy. Consult an insurance agent for more information about insurance coverage for a home-based childcare business.

Finance your daycare business

Depending on the type of business you operate, starting a daycare business can involve a degree of upfront investment and may require you to obtain financing. A business bank loan or SBA-backed loan are common sources of small business financing. These funds can be used to procure equipment and other capital expenses.

If you meet the criteria, you may also be eligible for a grant or low-interest loan. Check with your state’s Childcare Resource and Referral (CC&R) agency for information.

In addition, you may be able to obtain federal government funding for childcare. For instance, the Child and Adult Care Food Program (CACFP) provide reimbursement to qualified childcare providers for a portion of childcare food costs. Childcare subsidies are also available from the federally funded Child Care and Development Fund (CCDF), find your local program here.

Establish policies and procedures

Start by setting reasonable expectations for your clients. Write up a contract that outlines what services you provide and what items parents are responsible for (e.g., diapers, wipes, and other supplies). Also include details such as drop-off and pick-up times, penalties for being late, your policies for sick children, and so on.

Many states require that these policies are outlined in writing. Check with your local Child Care Resource and Referral agency to find out more.

In addition to policies, you may also want to draw up contracts of employment for employees or independent contractors.

Hire staff

When hiring, be sure to check the ratio of staff to children that your state permits. When planning your staffing needs, rigorously examine their qualifications and experience. You may also need to conduct criminal background checks and fingerprinting.

Market your daycare business

Think about how you will get the word out about your daycare business and build a loyal customer base.

  • Launch a website: Create a website that is optimized for search engines, this will ensure your daycare ranks high in online searches. Use key search words and phrases in your body copy, headers, and metadata. Ensure your website is visually interesting and designed with desktop and mobile users in mind.
  • List your business online: Set up business pages and accounts on Facebook, Yelp, Instagram, Google my Business, and Twitter.
  • Standout in the childcare community: Include your business in local childcare directories and participate in daycare enrolment fairs and events.
  • Advertise: Get the word out through local businesses, community events, parent groups, and childcare forums and blogs.

Frequently asked questions to starting a daycare

How much does it cost to open a daycare?

According to Entrepreneur, the average cost of starting a daycare business is between $10,000 and $50,000. However, the actual cost depends on the business you operate. A home-based daycare is much less costly to start and run than building, purchasing, or leasing a facility. Decisions such as whether you choose to provide food, your daycare hours, the number of children you care for, salaries, and more should also be factored into your startup budget.

How much does it cost to run a daycare monthly?

Create a budget during the business plan phase. This will help you avoid any unexpected surprises and inform any financing needs. Remember, your costs and line items will vary based on the type of daycare you operate. These will include, but not be limited to:

  • Mortgage payments or rent
  • Utilities
  • Insurance
  • Loan interest payments
  • Wages and benefits
  • Payroll taxes
  • Furniture
  • Toys, games, and other equipment
  • Supplies
  • Marketing and advertising
  • Food

How much money can you make owning a daycare center?

The industry does offer significant opportunity and is worth $27 billion annually — and the market is growing rapidly. Your profitability will be impacted by several factors, including your location, overhead costs, quality and range of care services, reputation, marketing, the competition, and how efficiently you run your operations.

How to set prices for your daycare business

Your fees need to be competitive and affordable, but they must also reflect your experience, daycare environment, and the quality of care and learning that you provide. Consider your costs, desired profit margins, and demographics of the area you will serve.

Find out what other daycare providers charge. Contact competing facilities directly or reach out to your local childcare referral agencies or licensing offices. The Economic Policy Institute also shares information on the rates in your state.

Then revisit your budget and factor in your expenses and expected profits to arrive at a rate for your clients. If you want to increase your client base over time, you can consider opening other locations.

What certifications do I need to open a daycare?

At a minimum, you will usually need a high school diploma. However, childcare experience is a plus and something parents will look for. Typically, owners and directors of daycare centers need a childcare-related field or a teacher certification.

As for your employees, daycare centers may require their providers to have an associate or bachelor’s degree in early childhood education, a childcare license, or one of two nationally recognized credentials (the Child Development Associate (CDA) and the Certified Childcare Professional (CCP)).

Other qualifications may include a food handler certification, first aid and CPR, and early childhood education (ECE) certification.
Check with your state also. Many require a minimum qualification to become a childcare provider.

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