1. I guess the main question is when does babysitting become "daycare" which we know requires licensing and insurance?
Under the provisions of the Manual of Requirements for Child Care Centers (N.J.A.C.10:122) if you are caring for six or more children below 13 years of age is required to secure a license from the Office of Licensing in the Department of Children and Families, unless the program is exempt by law.
See 10:122-1.2(d) for a list of these exemptions:
2. If we are merely babysitting a small group of children on the beach/playground for a few hours at a time during July and August (with the intention of giving parents a few hours to enjoy their vacation in peace and quiet), with no facility and the parents' permission, are we opening ourselves up to any liabilities?
Yes, any time you care for someone else's children whether as a baby sitter or in a formal day care facility you are held to the standard of reasonable care. So at a minimum you could be sued for negligence.
3. And if so, is there any protection we should consider?
You should consider buying liability insurance; see link below for an example:
You would also want to consider opening the business
under an S-corporation
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