The Business of Running a Bed and Breakfast
Running a Bed and Breakfast (“B&B”) sounds great at 5:00 pm rush hour on the streets of Manhattan during the cold winter. The fact is that 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’s 8 pm on a Friday in the middle of summer in your lovely B&B. You have just finished clearing out the dining room, where your guests recently enjoyed light meals and drinks. Are you tired. It has been a long day. She’s about to start doing the dishes, which will take an hour or so, and the phone rings. It is John Smith, a late guest who was due to check in at 9:00 pm He tells her that he will be there by 10 pm at the latest.
It’s now 9:00 pm, you’ve just finished doing the dishes, and now you’re throwing the dirty towels in the laundry room and picking up new towels to replace the old ones in the bathrooms. This takes you an hour or so. You check your watch. It’s 10 pm, there’s no John Smith. “Where could he be?” you ask yourself. You check the phone for messages, none. At 10:30 p.m. the phone rings. It’s John Smith. He’s on the Garden State Parkway at exit 117. He should be there in about a half hour. At 11 pm John Smith finally arrives. You check him in, show him his room, and at 11:20 pm you run to your room to go to bed because you promised early riser Julie Murphy that you’d have fresh coffee and a continental breakfast for her by 6 am if she’s lucky. , passes out from exhaustion at 11:45 pm and sleeps just over five hours.
Welcome to the tranquil world of B&Bs. Not your typical day, but you get the idea. My point is this, running a B&B is not as easy as you think. However, it can be everything you thought it would be, as long as your thoughts are grounded in reality.
The level of your attention to detail, coupled with the location of your B&B, can make your B&B a success or a nightmare. During your B&B’s peak season (primarily May through September in the Northeast), you’ll always be 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 5am.
What constitutes a B&B? Generally speaking, anything with more than 5 rooms is considered an Inn and anything less is considered a B&B.
How do you know if your B&B is successful? 100 nights, a year, full to capacity, is a good year.
Can you make a living running a B&B? In most cases, you’ll need about six rooms to make 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 a well-run B&B requires and the last-minute cancellations or guests who just don’t show up.
Should you list your B&B with a Reservation Services Agency (“RSA”)? If this is your first B&B and you’re just starting out, the answer is a resounding yes! This is why. A good RSA provides a number of valuable services. First of all, they can attract business to your B&B. Many RSAs deliver brochures to state-run Welcome Centers. Some RSAs reach out to local businesses and special event coordinators. When a potential guest picks up one of those brochures and calls the RSA, they will provide B&Bs that meet their geographic and personal needs. Other benefits of joining an RSA include valuable advice on running your B&B. Many RSAs will usually come to your B&B to see if you have the right setup to host guests.
They usually bring a checklist with them and go through some type of inspection process. You will soon discover what strengths and weaknesses your B&B has. Often this service is offered free of charge, as an initial consultation. The RSA will do this as a way of determining if your B&B meets its minimum standards. This inspection helps to develop the problems inherent to your B&B. If it passes inspection, the RSA will be interested in listing your home. Typical operational services provided by an RSA, beyond those listed, include answering phones, email/email inquiries, screening and matching guests with hosts. Confirmations will be sent to guests who make reservations. Some even send regular newsletters to hosts and help hosts with record keeping and tax preparation. All of these services, of course, come at a cost. In general, the commission of an RSA will be between 20-25% 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 occupancy 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? Operating expenses of a B&B include food, beverages, coffee filters, soap, shampoo, toilet/facial paper, cleaning supplies, housekeeping help, laundry, new sheets, paint, repairs, bedding, towels, fresh flowers , new mattresses, advertising/promotion, stationery, expiry/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 tax, and mortgage interest.
What type of accounting or bookkeeping system is needed in a well-run B&B? Accounting for a B&B does not have to be so complicated. Your options are a manual accounting system or a computer-based one. A manual accounting 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 major expenses in each compartment and place your expense receipts in each expense envelope. For those expenses that don’t fit neatly into any category, include a “miscellaneous” envelope. At the end of the month, record your expenses on a control sheet that lists expenses on the left and a column for each month on the right. Subtract the month’s total from your receipts for the month and you’ll 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 accounting software programs to learn and use 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 a rudimentary accounting system, then use your checkbook as your accounting system. However, make sure that any expenses you incur are recorded in your checkbook or that a specific credit card is used only for business purchases, if you’re 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 what a B&B owner should look like. I would recommend that the B&B be personally owned. The reason is that there are tax advantages to owning the B&B personally. An important tax benefit is the personal residence exclusion of any earnings 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 sale of the B&B using a like-kind exchange, which allows the seller to defer taxes on any gains from the sale of the B&B, as long as the like-kind goods (real estate) real estate) is acquired within six months from the date of sale of the B&B. With a direct personal ownership structure, you could lease the B&B to the legal entity that will run the business. In no case would you run the B&B business as a sole proprietor, as a sole proprietor has unlimited liability.
My first choice would be a corporation in which a Selection is 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 (i.e., an employee was responsible for the negligence or injury and you did not order for that to happen). employed 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 may be personally liable for any negligence or injury, even if caused by an employee. In a corporation, only corporate assets are at risk. Your personal assets are safe. Personal liability at the corporate level would require “piercing the corporate veil”, something that is very difficult to do given the long history of corporate case law limiting this. In an S corporation, any net income or net loss and certain other tax items will flow to your personal income tax return, since an S corporation is a pass-through entity.