This article is an excerpt from my Buying ebook on forms of ownership you can consider as you acquire your bed and breakfast.
Some people never consider doing anything regarding form of ownership for their B&B Inn while others carefully consider their options. For many reasons, including tax implications, liability protection, and estate planning, it’s prudent for you to study your options and take action sooner than later. My discussion here is intended to alert you to some options, it’s not legal or accounting advice. Since laws vary from state to state and you have a unique personal situation, your tax attorney or accountant can counsel you into the best form of ownership.
- Sole Proprietorship
If you go into business by yourself without doing anything else (structure-wise) you have a sole proprietorship. A sole proprietorship is the simplest form of business where one individual owns and conducts the business. The business owner is personally liable for all the obligations of the business. Money usually comes from bank loans, friends, family, etc. You get to keep the profits and have to personally cover any negative cash flow. A sole proprietor-run business generally does not have to be registered unless it uses an assumed business name (“DBA”). If the name of the business does not include the legal name of the business owner, the business name must be registered as an assumed name with the local county or state in which it is located. This allows the public to identify who is transacting business under that business name.
- Partnership: General and Limited
A partnership is an association of two or more owners, and have two classes of ownership — general partners and limited partners. The general partners commonly run the business and are fully liable for all debts. Limited partners are only liable for debts to the extent of their capital invested. In this arrangement you do have a partner, but there is no limit to your personal liability for partnership bills (except with a limited partnership, then all but the general partner have limited liability).To form a limited partnership, a Certificate of Limited Partnership must be filed with the Secretary of State. As with the other entities listed, the name must be searched to insure that it is not deceptively similar to another name on file and a “registered agent” must be maintained.
- C Corporation (from Latin, Corpus = body)
A corporation acts as a legal entity in and of itself — it exists separately from its owners. It continues to exist even if the shareholders change. As a separate legal entity, the corporation is responsible for filing its own tax returns. Liability is generally limited to the amount invested in the business, but you have to pay individual and corporate income taxes. Corporate tax can be as much as 35 percent.
- S Corporation
There is limited liability to the owners and they don’t pay corporate taxes. A corporation can’t be an investor. There are restrictions on the voting power and allocation of profits to the owners. It’s fairly easy to err and lose your S Corp status — then you could lose 35 percent of your profits to extra taxes.
- Limited Liability Company (LLC) — rules vary by state
An LLC (note the “C” stands for “company” not “corporation”) is a legal entity having one or more members. The LLC can be managed by one or more managers or by its members. Managers can be, but are not required to be, members. The internal affairs are governed by operating agreements which may be analogous to corporate bylaws or partnership agreements.
A method of distributing products or services. The franchiser lends his trademark or trade name and his business system to the franchisee, who pays a royalty and often startup fees for the right to do business under the franchiser’s trademark and system.
- Strategic Partnership
A small company joins forces with a large company for financial and/or technical assistance — A Partnership owns the building and leases it to the S Corporation that operates the inn.
One Suggested Arrangement:
- Additional Ideas:
- Use of an LLC in the above idea for either position.
- Use of a Trust as property owner.
There are lots of ways you can own the real estate and business in a bed and breakfast venture. Your job is to balance the liability protection and maximize cash flow and tax benefits. I once had a client who started his business as a sole proprietor but decided to take advantage of tax benefits by forming another entity to own the business; his tax accountant/bookkeeper urged him to not make any changes because it would cost more for him to do his taxes each year. The little extra it costs to have more complex tax reports prepared is well worth the benefits you get by taking a form of ownership other than sole proprietor.
Do you homework, work with professionals and act on forming a business entity for your bed and breakfast business.