Aspiring Innkeeper Seeking Veterans' Advice on Business Structure

Hi, all! My husband and I are strongly considering the B&B lifestyle and are in the research and planning phase of our journey. I have signed up for a seminar with the B&B Team and am trying to soak up as much information as possible to ensure we are making thoughtful and educated decisions. But one aspect of innkeeping which I haven't been able to find a lot of information on, however, is how the business structure is reflected in the physical property. IE, is the land and real estate owned by the individual? The business? A holding company? Is it different (and if so, how) if the owners live in a separate cottage on the property? Do they "rent" their residence from the business? What are the tax implications of living in a separate cottage? Anything else I should be considering? I would appreciate your feedback as to how you structured your business/property ownership to ensure that both you and your business were protected. I understand that much of this will be dependent on acquisition strategy (residential vs commercial loan), and we are weighing the pros and cons of each.
I'm sure I will have many more questions as we continue on this journey, and I look forward to learning from all of you and your individual experiences and expertise!

When I opened in 1996, doing an LLC was complicated (at least so I was told) so I am a sole proprietor. I live in 1/3 of the house and the 2/3 is registered with the assessor's office as business. This shows I am serious (not just life-style) and I pay commercial real estate rates on 2/3 of the property. At tax time, my taxes and the business are mooshed together but I keep personal and business expenses separate. Today, I would most likely go LLC to protect my finances from business. I am at an age now that it does not matter to me. Others can tell you how that works - I only know that every few years I show a profit. I have a great tax person.

I would recommend sitting down with an accountant and/or a lawyer to sort through the various issues and how they might apply to you. Our business is organized as a corporation, and the corporation owns the property. We are employees of the corporation, and our housing is provided to us as an untaxed benefit since the operation of the business requires that we live on site. In our case there are some liability and other tax related issues that make a corporation desirable. But there are a lot of complicating factors, which is why I recommend discussing this with an accountant and/or lawyer.

Ditto what on the shore said. You are going to need a good accountant and lawyer in the future, so scope them out now.
A lot depends on what you buy and how you pay for it. Being a corporation might work well. Or, it might not. For the first few years it would be helpful to have someone helping you with major financial decisions.

OnTheShore said:

I would recommend sitting down with an accountant and/or a lawyer to sort through the various issues and how they might apply to you. Our business is organized as a corporation, and the corporation owns the property. We are employees of the corporation, and our housing is provided to us as an untaxed benefit since the operation of the business requires that we live on site. In our case there are some liability and other tax related issues that make a corporation desirable. But there are a lot of complicating factors, which is why I recommend discussing this with an accountant and/or lawyer..

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In my Aspiring Innkeeper classes I recommend both layer and financial person Finance person to see where you are now and where you want to be in the future. Lawyer to have a progression of ownership in case of death or divorce. I say it is a case of pay me now or pay me later - and later is a LOT more expensive.

Thank you, everyone! Yes, I should have mentioned in my original post that we will ABSOLUTELY be seeking out professional counsel throughout this process. We recognize that there are some matters on which we will simply never be experts (nor do we want to be) and we are not interested in going at it alone. To your point, gillumhouse, that could be a very expensive mistake! That said, I do want to educate myself as much as possible up front so I have a basic level of understanding of what our options are when we do initiate those discussions, and so I know the right questions to ask.
My husband will continue to work to bring in outside income, and I anticipate that it would benefit us to have that income factored into the mix from a financing perspective, which leaves LLC and Corp as our best entity options. I was originally leaning towards LLC for it's simplicity and pass-through tax structure, but you brought up some interest points, OnTheShore, which I hadn't considered--thank you!
I really appreciate the comments and insight and would love to hear from more of you!

INNvestigating said:

Thank you, everyone! Yes, I should have mentioned in my original post that we will ABSOLUTELY be seeking out professional counsel throughout this process. We recognize that there are some matters on which we will simply never be experts (nor do we want to be) and we are not interested in going at it alone. To your point, gillumhouse, that could be a very expensive mistake! That said, I do want to educate myself as much as possible up front so I have a basic level of understanding of what our options are when we do initiate those discussions, and so I know the right questions to ask.
My husband will continue to work to bring in outside income, and I anticipate that it would benefit us to have that income factored into the mix from a financing perspective, which leaves LLC and Corp as our best entity options. I was originally leaning towards LLC for it's simplicity and pass-through tax structure, but you brought up some interest points, OnTheShore, which I hadn't considered--thank you!
I really appreciate the comments and insight and would love to hear from more of you!.

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By default, any corporation would be considered a C-corp, unless they qualify for and choose to elect S-corp status. S-corps are pass-through entities, but then benefits (like a place to live) from an S-corp to employees (who are also shareholders) have to be considered as and taxed as income to those owners. C-corps are subject to "double taxation" (the corp pays taxes on its income, and the shareholders also pay tax on any dividends paid to them by the corp), but many benefits to employees (even if shareholders) are not taxed. Also in the mix, the Tax Cut and Jobs Act lowered corporate tax rates, so I've heard that many s-corps are giving up their s-corp election to get the better tax rates now afforded to C-corps.... As you can see, it can get complicated (not necessarily in setting up the corp, but in figuring out the best approach!).
LLC's are considered dis-regarded entities by the IRS -- single-member LLCs would be treated as Sole Proprietors, multi-member LLCS as Partnerships. BUT, LLCs can elect to be treated as S-corps for tax purposes. To my way of thinking, why not just choose an S-corp format to begin with? In my experience, corporations are not really any more difficult to set up and maintain than I think an LLC would be, and perhaps offer even better liability protections (ultimately).
IMHO, YMMV, etc...

The B&B Team will answer those questions and help you decide which one is the best for you so I'll just wish you the best. Bring paper, pen and be ready to learn. Lots of fun as well as meeting innkeepers from the area. Also have them check to see if your targeted area qualify for grants for B&Bs.

Our business entity owns our bed and breakfast, but I've learned that this is not the best structure for us. It's too late to fix, but when we switched to a long time business accountant, he advised us that if we ever do it again, to own the structure and assets in our personal name and have the business "lease" the structure and assets from us as individuals. This offers a little more liability protection as well as gives us as individuals personal income.
We are in Arkansas, so I'm sure it is different from state to state. But I think the principles still apply.
Hope this helps.