The business of running a Bed and Breakfast
Running a Bed and Breakfast (“B&B”) sounds great at 5:00 PM. M. Peaking on the streets of Manhattan during the cold of winter. The fact is, it can be a real job. Let me give you an idea of what life is like for a typical B&B owner.
Imagine it is 8pm on a Friday in the height of summer at your charming B&B. You have just finished cleaning the dining room, where your guests recently enjoyed some light meals and drinks. Are you tired. It has been a long day. You’re about to start washing the dishes, which will take an hour or so, and the phone rings. It’s John Smith, a late-night guest, who was supposed to check in at 9pm. He tells her that he will be there no later than 10pm.
It is now 9pm, you have just finished the dishes and now you are throwing dirty towels into the clothes and collecting new towels to replace old ones in the bathrooms. This will take an hour or so. Check your watch. It’s 10 PM, not John Smith. “Where could it be?” you ask yourself. He checks the phone for messages, none. At 10:30 pm the phone rings. It’s John Smith. It’s on the Garden State Parkway at exit 117. It should be there in about half an hour. At 11 pm John Smith finally arrives. He checks him in, shows her to her room, and at 11:20 p.m. he rushes to her room to go to bed because he promised early riser Julie Murphy that he would have fresh coffee and a continental breakfast for her at 6 a.m. . If you are lucky, you will pass out from exhaustion at 11:45 pm and be able to sleep a little over five hours.
Welcome to the laid-back world of B & Bs. It’s not your typical day, but you get the idea. My point is this, running a B&B is not as easy as it sounds. However, it can be everything you thought it would be as long as your thoughts are anchored in reality.
The level of your attention to detail, coupled with the location of your B&B, can make your B&B a true success or a true nightmare. During peak season your B&B (mainly May to September in the Northeast) is always on the go. Your hours are dictated by the hours of your guests. A late arrival can keep you up late and an early riser may require you to wake up at 5 a.m.
What constitutes a B&B? Generally speaking, anything larger than 5 rooms is considered an inn and anything smaller is considered a B&B.
How do you know if your B&B is successful? 100 nights a year, packed to the max, it’s a good year.
Can you make a living with a B&B? In most cases, you will need around six rooms to earn a living. Anything less is just supplemental income. If a host wants to make a living in a B&B, he must open an inn.
What are the biggest problems B&B hosts face? Usually it’s the attention to detail that is required of a well-run B&B and last minute cancellations or guests who just don’t show up.
Should you list your B&B in a reservation service agency (“RSA”)? If this is your first B&B and you are just starting out, the answer is a definite yes. This is why. A good RSA provides a number of valuable services. First, they can drive business to your B&B. Many RSAs provide brochures to state-run Welcome Centers. Some RSAs contact local businesses and special event coordinators. When a potential guest picks up one of those brochures and calls the RSA, they will provide the potential guest with B & Bs that meet their geographic and personal needs. Other benefits of joining an RSA include valuable tips on managing the B&B. Usually many RSAs will come to your B&B to see if it has the proper setup to accommodate guests.
They usually bring a checklist with them and go through some kind of inspection process. You will soon discover the strengths and weaknesses of your B&B. Often times this service is offered free of charge, as an initial consultation the RSA will do this as a way to determine if your B&B meets their minimum standards. This inspection helps to clarify the problems inherent in your B&B. If you pass the inspection, the RSA will be interested in listing your home. Typical operational services an RSA provides, beyond those listed, include answering phones, email / mail inquiries, screening and matching guests with hosts. They will send confirmations to guests who make reservations. Some even send out regular newsletters to hosts and help hosts with record keeping and tax preparation. All of these services, of course, come at a cost. Generally, the commission for an RSA will be between 20 and 25% of the rental income of the guests who book.
How much should you charge per room per night? Most B & Bs charge a minimum of $ 100 per night for a double room. Depending on your geographic location, this amount could be significantly higher or lower.
What kind of costs / expenses can you expect to incur at your B&B? The expenses to run a B&B include food, drinks, coffee filters, soap, shampoo, toilet / facial paper, cleaning supplies, cleaning aid, laundry, new sheets, paint, repairs, bedding, towels, flowers fresh, new mattresses, advertising. / promotion, stationery, dues / subscriptions, business cards, reading lamps, telephone, internet access, commission to your RSA, membership dues to local business organizations (i.e. Chamber of Commerce), insurance, utilities , accounting fees, legal fees, income taxes, real estate taxes and mortgage interest.
What kind of accounting or bookkeeping system is needed in a well-run B&B? Accounting for a B&B doesn’t have to be so complicated. Your options are a manual or computer-based accounting system. A manual bookkeeping system could be as simple as a checkbook, an accordion file, and a few envelopes. The accordion file should have twelve compartments for each month. Include envelopes for your main expenses in each compartment and place your expense receipts in each expense envelope. For expenses that don’t fit neatly into either category, include a “miscellaneous” envelope. At the end of the month, count your expenses on a tally sheet that lists expenses on the left and a column for each month on the right. Subtract the total for the month from your receipts for the month and you will know how much money you made or lost. A computer-based system should be one that is easy to use. I recommend QuickBooks as it is one of the easiest to learn and use accounting software programs on the market. A few hours with your accountant, learning QuickBooks, can save you many more hours of trial and error, not to mention frustration and stress, down the road. If you feel like you don’t have the attention to detail to maintain even a rudimentary bookkeeping system, use your checkbook as your bookkeeping system. However, make sure that all expenses you incur are recorded in your checkbook or that a specific credit card is used for business purchases only, if it is not good at keeping receipts.
Should I organize my B&B as a sole proprietorship, partnership, corporation or LLC?
This is not an easy question to answer. Before I get to that answer, let me talk about how the B&B should be owned. I would recommend that the B&B be personally owned. The reason is that there are tax advantages for owning the B&B personally. An important tax benefit is the personal residence exclusion of any gain up to $ 500,000 ($ 250,000 for single taxpayers) on the personal residence portion of your B&B. Another reason is that this direct ownership better facilitates the use of a tax-advantaged B&B sale through a similar rate exchange, allowing the seller to defer taxes on any proceeds from the sale of the B&B, provided the similar rate property (real property) is acquired within six months from the date of sale of the B&B. With a direct personal ownership structure, you can lease the B&B to the legal entity that will run the business. In no case would I run the B&B business as a sole proprietorship, since a sole proprietorship has unlimited liability.
My first choice would be an S corporation being made. The S corporation offers the best limited liability protection, even better than an LLC or partnership. This is why. In an LLC, your personal liability is limited, in the event of a negligence claim, but only if you did not personally cause the negligence or injury (that is, an employee was liable for the negligence or injury and you did not order that used to perform that act). If you had something to do with the negligent act, you and all of your personal property may be at risk. In a partnership, as a general partner, you can be held personally liable for any negligence or injury, even if it is caused by an employee. In a corporation, only corporate assets are at risk. Your personal property is safe. Personal liability at the corporate level would require “breaking the corporate veil”, something that is very difficult to do given the long history of corporate jurisprudence that limits this. In an S corporation, any net income or net loss and certain other tax items will carry over to your personal income tax return, since an S corporation is a transfer entity.