My wife has started a family daycare business from home in San Diego County California
my question is : what is the best way to file taxes ?
Don't walk, RUN! to a tax professional. Especially since your state also taxes personal income and has strict (usually costly) registration and licensing requirements that, if not met will result in some rather hefty fines.
should we create a corporation / LLC ?
Ask this question to a local tax professional.
do we need a liability insurance for the business or the property insurance is enough ?
Your typical homeowner's insurance policy does not cover anything beyond "residential use". If you are running a business out of your home, you need a separate insurance policy for that. Especially for a daycare business. I can't speak for CA, but in my state of FL the insurance liability requirement for daycare is something like a minimum of $1M. Can be higher depending on to many circumstances to list here. So you'll need to check with your business licensing agency
YOu may want to take a read at https://www.forbes.com/advisor/business/business-license-california/ to get a general idea. Since I'm not a CA resident, I'm not exactly the best source for information on this. I just know enough about CA to know the local taxing authorities will have no mercy if you don't follow the rules.
