Business models: Part 2 - Private company - Great and small

The majority - 59 per cent - of the country's 16,700 nurseries are run as private businesses. Most commonly these take the form of companies limited by shares. Included in this group are Asquith Day Nurseries, Bertram Nursery Group, Treetops, Kinder Nurseries, and Hadland Care Group.

Private company limited by shares

A private company limited by shares is a legal entity in its own right. Corporation tax must be paid on its profits. In many cases, directors' 'liability' or legal responsibility - and thus personal financial risk - is limited, as any debts and liabilities relating to the company 'belong' to the company itself. The Companies Act places legal duties on the company directors, such as the registration of company records.

Mama Bear's Day Nursery is a family-owned private chain with 19 nurseries, 425 staff and a turnover of £7m. Its co-founder Tony Driffield worked for 20 years in marketing management in the private sector and says he is 'unashamedly capitalist', but adds, 'In ten years we have reinvested more money in the business than we have made in profit.'

He says, 'I wanted to work with my wife -she was a teacher, my background was business. We considered setting up as a charity as we wanted to achieve certain social outcomes. But this would limit the way we accessed funding.' The company nevertheless won some lottery funding because it could demonstrate it had a social ethos.

Mr Driffield says, 'The key point in our memorandum of association, which is like a road map for the company, is "Mama Bear's will be a provider of high-quality affordable childcare for the local community."'

He adds that childcare is moving towards private providers 'adopting a more socially responsible model'. 'Middle class families paying for their childcare so they can go to work has become outdated; we now have the two-, three- and four-year-old offer,' he says.

He adds, 'I believe competition breeds efficiency. We do business with local authorities and our costs base is about half (of theirs) to deliver care at the same or a better standard.'

The fact the company is family-run means the owners have more control over the way profit is spent than if shareholders or investors were calling the shots: 'We have a setting that in five years hasn't made any money, but we made a commitment to that community to put a nursery there.' The company has given 6-9 per cent pay rises to the majority of its employees this year, he says.

Finding a backer can work if your goals are aligned, says chief executive of Kids Allowed Jennie Johnson. The five-nursery group is financed by £7m from a private backer, who has a shareholding in the company. The company pays dividends to shareholders and interest on the loan the investor put in. Ms Johnson says, 'I think it has helped (that we are) not being backed by a traditional venture capital fund.

'Although we are expected to run the business efficiently, the investor is behind our goals to, for example, pay living wage as our minimum wage and also our passion for highest quality. We focus on our team, parents and children, making sure they are happy, and in turn we have a great reputation both as a provider of childcare and an employer, that leads to very high occupancy levels. This makes us a successful business.'

Private company limited by guarantee

Kidzone Cranwell follows this model. It also has charitable status and operates from an RAF base. Centre manager Nikki Batt says the childcare centre was originally operating as a small charity with an income of £200,000 per year and changed its status when this figure rose to £500,000 to protect its board of unpaid trustees.

She says, 'We amended the constitution to say if somebody wanted to sue us the trustees' liability would be £10 each. It also means if we wanted to operate elsewhere we are able to, whereas we were not able to expand as a charity alone.

'It is the right balance for us - we're on an RAF base, the building is owned by the Ministry of Defence, so we're not in it to make money and pay dividends to shareholders, and profit isn't in our vocabulary. We reinvest the majority of our profits with any surplus used on special projects like refurbishment.'

The fact the company has charitable status allows it to access grants, which it recently did from the Armed Forces Covenant Libor fund.

Sole trader

Katrina Ennis founded Peekaboo Daycare last September. She now has three members of staff and a supply special educational needs specialist. She is registered for 28 children per session, which each last from 8am to 6pm with lunch provided.

Ms Ennis had previously worked as a pre-school manager, and opened a day nursery with charitable status in 2009 with council funding. Being a charity meant she was responsible to a board of trustees.

'I hated having to wait for the committee to make decisions, and having to speak to people who didn't have a clue about childcare,' she says. 'Even giving out information to parents regarding weaning was something I would have to run past the committee.'

Peekaboo Daycare operates out of Cortonwood Comeback Centre in Brampton, where she hires a hall and an outside space.

As a sole trader, all the liability is hers. She says, 'I have policies for absolutely everything and make sure everything is up to date. I thought I would be lenient with finances but actually I am not, and perhaps it is because it is my own money. I used to have someone to look after all the accounts, but now I do all of that as well as running the business.

'I love being able to make the decisions. I make all the statutory decisions, though I get staff's viewpoint on anything about changes in the setting. Every day we are changing things.

But it is laid back, relaxed, and even though I own it everyone is part of it. If this works out, my aim is to open another Peekaboo Daycare elsewhere. If I expanded I'd have to think about changing the structure of the company - if there is a big financial risk you really need to be protected.'

Partnership

Unlike in a private company, a partnership -where two or more individuals share the responsibility for the management and the profits - means unlimited liability for those involved. This means a partner can therefore be held personally responsible for any unpaid debts the partnership incurs.

Richard Bennett founded The Old Barn Day Nursery in Banstead, in 1989 with wife Alison. The pair have been married for 36 years.

Mr Bennett says a partnership was chosen for 'the simple reason it made accounting so much easier. We didn't have to spend vast sums on hiring accountants (which we would have had to do in those days); we could do the accounts ourselves.'

Instead, he says, their agreement is one of trust and word of mouth (though most partnerships have a partnership deed setting out procedures and rules). 'There is so much paperwork associated with running a nursery now anyway, and a partnership is so straightforward. We have no governing documents. We don't need to have annual meetings, or file reports to Companies House. All I submit are tax returns on behalf of the partnership and individual tax returns for each partner.'

Unlike in a private limited company, each of the partners pay income tax of up to 40 per cent on their share of the profit and don't benefit from the lower rate of corporation tax, which is currently between 20 and 21 per cent.

'A lot of people have told us that we should be a limited company to get the tax benefits,' says Mr Bennett. 'But if we converted we would have to pay a large sum to the tax man - ten per cent of the value of the company. We'd need to gain quite a lot of benefit for that to work.

'I can see there are benefits to being a limited company - the idea that your liability is limited is one. In a partnership, if anything tragic happens the liability is whatever the remaining partner is insured for.

'I would also say that no matter how watertight your business documents are, if your partner doesn't have any money then the partnership agreement is utterly worthless.

'Being a partnership has certainly worked for us perfectly over 25 years of being in business. It is a bit like going into a civil partnership - you share risk and benefits and to some extent it makes it more fun.'

Limited liability partnership

One way of gaining the benefits of the partnership while protecting yourself is a limited liability partnership (LLP). Like a limited company an LLP has its own legal identity, which means responsibility for debts is passed to the company rather than individuals. It requires registration with Companies House and is more complex than a normal partnership as it involves complying with the Limited Liability Partnerships Act.

Kim Drew is owner of abc Nursery, a day nursery based in Corsham Children's Centre, which is run by Barnado's. She bought the nursery from a sole trader in 2004 and went into partnership with another nursery practitioner, but the partnership ended after a couple of years.

She says, 'When I first began the company being an LLP was quite new. The cost of dissolving the partnership would have been about £5,000 so my husband, who is a farmer, bought my partner out. Now, I and my staff make all the decisions as a team - my husband just takes an interest.

'An LLP is quite straightforward. I think it is very good if you are going in with someone else you might not know very well as you are both protected. Accounts are split 50/50, so are any profits. When my partner left everything was easy to split and it was all sorted out in ten days. Had it been a partnership it would have been much more complicated. However, my accountant does want me to become a limited company for tax reasons.'

The next article in this series, on 3 November, will be on employee ownership and co-operatives.