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The Business of Running a Bed and Breakfast
A bed and breakfast (“B&B”) sounds great at 5:00 PM rush hour on the streets of Manhattan during a cold winter. The thing is, it can be a real job. Let me show you what the life of a typical B&B owner looks like.
Imagine it’s 8pm on a Friday in the middle of summer in your lovely B&B. You have just finished cleaning the dining room where your guests recently enjoyed light meals and drinks. You are tired. It was a long day. You’re about to start doing the dishes, which will take you an hour or so, and the phone rings. This is John Smith, a late guest who was supposed to check in at 9:00 p.m. He tells you he will be there no later than 10:00 p.m.
It’s 9pm, you’ve just finished washing the dishes and now you’re throwing the dirty towels in the laundry room and collecting new towels to replace the old ones in the bathrooms. It will take another hour or so. You look at the clock. It is now 10:00 p.m., and John Smith is gone. – Where could he be? you wonder to yourself. You check your phone for messages, no. At 22:30 the phone rings. This is John Smith. He is on the Garden State Parkway at exit 117. He should be there in about half an hour. At 11pm John Smith finally arrives. You check him in, show him to his room, and rush to your bedroom at 11:20 p.m., because you promised Julie Murphy you’d get up early, make her fresh coffee, and a continental breakfast at 6 a.m. If you’re lucky, you’ll pass out from exhaustion at 11:45 p.m., and get just over five hours of sleep.
Welcome to the peaceful world of boarding houses. Not your typical day, but you get the idea. My point is that running a guesthouse is not as easy as you might think. However, it could be anything you thought as long as your thoughts are anchored in reality.
Your level of attention to detail and the location of your B&B can make your B&B a real success or a real nightmare. During your bed and breakfast’s busy season (mainly May through September in the Northeast), you’re always on the go. Your hours are dictated by the hours of your guests. A late arrival can make you sleep late, and if you are an early riser, you may need to wake up at 5 am.
Frequently asked questions
What is a B&B? Generally speaking, anything with more than 5 rooms is considered a hotel, and anything less is a boarding house.
How do you know if your B&B is successful? 100 nights a year, fully booked, good year.
Can you make a living running a boarding house? In most cases, you’ll need about six rooms to earn this. Anything less is just extra income. If the owner wants to make a living in a boarding house, he must open an inn.
What are the biggest challenges B&B owners face? It’s usually the attention to detail required of a well-run bed and breakfast, as well as last-minute cancellations or simply no-shows.
Should I outsource my bed and breakfast to a reservation agency (RSA)? If this is your first bed and breakfast and you’re just starting out, the answer is a definitive yes! That’s why. A good RSA provides a number of valuable services. First of all, they can refer business to your bed and breakfast. Many RSAs provide brochures to state Welcome Centers. Some RSAs reach out to local businesses and special event coordinators. When a prospective guest picks up one of these brochures and calls the RSA, they will match the prospective guest with B&Bs that match their geographic and personal needs. Other benefits of joining the RSA include valuable advice on how to run a B&B. Many area service representatives will usually come to your bed and breakfast to check that it is properly set up to accommodate guests.
They usually carry a checklist and go through a specific screening process. You will soon learn what your B&B’s strengths and weaknesses are. Often this service is offered free of charge as an initial consultation. The RSA will do this to determine whether your B&B meets the minimum standards. This check helps pinpoint issues specific to your B&B. If you pass the inspection, the RGA will be interested in listing your home. Typical operational services provided by RSA, in addition to those mentioned, include answering phone calls, email inquiries, checking in and matching guests with hosts. They will send confirmations to guests who have made a reservation. Some even send out regular newsletters to landlords and help landlords with bookkeeping and tax preparation. All these services, of course, come at a cost. Typically, RSA’s commission will be 20-25% of the rental income of the guests they book.
How much should you pay for a room per night? Most bed and breakfasts charge a minimum of $100 per night for a double room. Depending on your geographic location, this amount could be much higher or lower.
What costs/expenses can you incur in your guesthouse? B&B management fees include food, beverages, coffee filters, soap, shampoo, facial/toilet tissue, detergent, housekeeping, laundry, new sheets, paint, repairs, linen, bedding, towels, live flowers, new mattresses, advertising/promotion, office supplies, fees/subscriptions, business cards, reading lights, telephone, internet access, fees to your RSA, membership fees to local business organizations (such as the Chamber of Commerce), insurance, utilities services, accounting fees, legal fees, income tax, property tax and mortgage interest,.
What type of bookkeeping or accounting system is needed in a well-run B&B? B&B accounting doesn’t have to be so complicated. Your options are a manual accounting system or a computerized one. A manual accounting system can be as simple as a checkbook, an accordion file, and a few envelopes. The filing cabinet should have twelve compartments for each month. Place envelopes for major expenses in each compartment and place receipts for expenses in each envelope. For expenses that don’t fit into any of the categories, include a “misc” envelope. At the end of the month, tally your expenses on a checklist that includes a list of expenses on the left and a column for each month on the right. Subtract your monthly total from your monthly receipts and you’ll know how much money you’ve made or lost. A computer system should be easy to use. I recommend QuickBooks because it is one of the easiest to learn and use accounting software 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 that you lack the attention to detail in keeping even a basic accounting system, use your checkbook as your accounting system. Make sure any expenses you incur, however, go through your checkbook or a specific credit card is only used 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?
It is not easy to answer this question. Before we get to that answer, let me touch on how a B&B should be owned. I would recommend the B&B to be personally owned. The reason is that there are tax advantages to owning a B&B personally. One major tax benefit is the personal residence exclusion from any income up to $500,000 ($250,000 for single taxpayers) from the bed and breakfast portion of your stay. Another reason is that this direct ownership better facilitates the use of the tax benefit for the sale of the B&B using a like-kind exchange, which allows the seller to defer taxation of any gain on the sale of the B&B as long as the similar property (real estate) is acquired within six months of the sale date B&B. With a direct personal ownership structure, you can rent out the bed and breakfast to a legal entity that will run the business. There is no way I would run a B&B business as a sole proprietor, as a sole proprietor has unlimited liability.
My first choice would be a corporation where the S election was made. The S corporation offers the best limited liability protection, even better than an LLC or partnership. That’s why. In an LLC, your personal liability is limited in the event of a lawsuit for some kind of negligence, but only if you personally did not cause the negligence or harm (ie, the employee is responsible for the negligence or injury and you did not direct the employee to do so action). If you were involved in a negligent act, you and all of your personal assets could 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 assets are safe. Personal liability at the corporate level would require “piercing the corporate veil,” which is very difficult to do given the long history of corporate case law that limits it. In an S corporation, any net income or net loss and certain other tax items will be reported on your income tax return because the S corporation is a pass-through entity.
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