First, for clarification’s sake, an LLC (Limited Liability Company) is a type of corporation. However, for ease of discussion I’ll use the term “corporation” to refer to a Subchapter S Corporation (we will leave C Corporations out of this discussion as impractical for putting a boat into). In the world of boat sharing, there is little difference between an LLC and a corporation. Both an LLC and a corporation provide personal liability protection, which is ostensibly the main goal of putting your boat into a corporate environment. Both LLC’s and Subchapter S Corporations provide pass-through taxation – meaning you would report profits and losses on your personal tax returns. However, since an LLC provides the same liability protection as a corporation and is much simpler to form and maintain, I find it is probably the better choice for this scenario.
Why would I want to put my boat into an LLC?
There are several reason you might want to transfer your boat into an LLC including liability protection, tax shelters and leveraging greater tax deductions.
Transferring your boat into an LLC is useful because generally it is the LLC who would be responsible for liability associated with the boat. For example, if one of your partners or a guest was seriously injured or killed on the boat they wouldn’t be able to sue you directly. Instead, they would sue the corporation that owns the boat and you and your personal assets would be protected from any judgments.
This protection is not absolute however. In some situations where the line is blurred between the “corporation” and the “individual,” courts can hold an individual personally liable which, in legalese, is referred to “piercing the corporate veil.” These situations can be complex and the many issues associated with this part of law would be an article unto itself. The bottom line is that the more blurry the line between a corporation and an individual the easier it is for someone to go after your personal assets if they win a judgment against a corporation you own.
For example, if there is only one shareholder/member/officer (the boat owner), no employees, no separate bank accounts, no income, no meetings – in short, if none of the things we normally see in a corporation exist, the corporation could be said to be a “sham” and a court could look beyond the “legal fiction” to the reality of the situation, i.e., you could be sued directly.
Putting your boat into an LLC can afford a measure of protection from liability but it is not an absolute protection. Further, for any protection to exist at all you need to make sure you treat the company as a company – filing corporate documents and keeping up with corporate meetings, regularly recording expenses and income and doing a thorough business tax return.
Can the LLC act as a Tax Shelter?
The answer is sort of. The LLC can work as a tax shelter for a future buyer in states that have high sales tax which can be appealing to buyers when you try to sell your boat. The basic idea is that if you buy a boat you pay sales tax on the transaction whereas if you buy a company that owns a boat you avoid sales tax.
This might be a consideration in the sale of a very large boat (i.e., saving the buyer a few thousand dollars of sales tax) but it does add complexity to the transaction (he would be buying a company not just a boat). And buyers who may not be familiar with corporations may be leary of why this boat is in one. In addition, some buyers would just purchase the boat from the company and you’d be left with a shell which you would still have to go through the process of dissolving.
Finally, unless the corporation is set up in a tax free state (like Delaware) you would still have to pay tax when you put the boat into the corporation.
So from a tax shelter standpoint, putting your boat into a corporation is a potential benefit only for a future buyer who may not even choose to use the benefit you’ve worked so hard to create.
Day to day tax implications
From a day to day tax standpoint, there may be some other advantages to putting your boat into an LLC such as leveraging accelerated depreciation schedules, taking losses for cleaning, maintenance, repairs, utilities, etc. However, there is a trade-off. A thorough and accurate tax return for a business that takes advantage of all the available tax breaks can be costly. And, unless you accurately and systematically record costs and income using a good accounting package such as Quickbooks, it can be difficult to leverage enough of a tax benefit to justify the cost and effort associated with the formation and maintenance of the LLC.
What are the Insurance implications of putting my boat into an LLC?
Based on the research we have done, there is not a lot of difference in premiums when insuring a privately held boat versus insuring one held by an LLC. The main thing to understand is that if you decide to go the LLC route, the insurance will need to be in the LLC’s name not yours. Have a look at our Insuring your boat in a Partnership blog for more information on insurance.
How do I get my boat into an LLC or corporation?
Putting your boat into an LLC is basically the same as selling it to another person and has all the same implications. In terms of title transfer, you would just need to register the boat in the LLC’s name. As usual however, there are several things to consider before taking this action.
First, if you have a note on the boat, the transfer of title from your name to the LLC may engage an acceleration clause. That is, most notes are going to have some standard language indicating that if any or all the interest in the asset/boat is transferred without the lenders prior written consent, the lender has the right to require immediate payment of the entire note balance. In most cases, the lender has no incentive to provide consent for the transfer into an LLC because it would limit their recourse if you stopped paying – i.e. it would make it more difficult to go after you directly.
Second, just like a sale between you and another person, there is a possible tax implication in the transfer to the LLC even though you are the sole owner of the LLC because the LLC is a separate legal entity from you. This will depend on a myriad of different factors and is a good reason to have an accountant help with the transaction.
Third, if you do have a note on the boat you are transferring into the LLC, your personal guarantee of the note can have the effect of weakening the wall between you and your company from a liability perspective as we talked about above. There is no way to directly calculate this risk but it is something to take into consideration if you are able to transfer the boat into the LLC while still holding the note personally.
Fourth, you could complete an actual sale of the boat to the LLC by getting a loan under the LLC which would then be used to pay off your personal loan. The issue here is that a corporate loan is going to have a higher interest rate (sometimes substantially higher) and it is often very difficult to get a loan for a brand new company that has no income, business model, employees, or other assets.
Using an umbrella policy in addition to or rather than forming an LLC
While an LLC is one possibility, if you only have one watercraft and are not planning on running a charter or rental business you can cover most of your risk by using a good partnership agreement and putting an umbrella policy in place. The partnership agreement will define the responsibilities and expectations as well as liability of the partners and if something does go wrong outside of anything contemplated by the agreement, the umbrella policy can cover most of your liability.
It should be noted that you will need to have adequate insurance on the boat in addition to the umbrella policy for it to be effective. In other words, you can’t just get an umbrella policy to insure an otherwise under insured asset. Both your boat and your other assets need to be in good shape from an insurance coverage point of view for this to work.
So…, should I put my boat into an LLC or Corporation before partnering or sharing?
As you can see there are many issues to consider before heading down this path. For the LLC to effectively protect your personal assets you need to take the time and expense of making the ongoing commitment of maintaining a company – filing all the right paperwork, recording expenses and income, doing your corporate taxes, etc.
Notwithstanding your decision to put the boat into an LLC, you will need to have a good strong partner agreement and should probably have an umbrella policy in place. You can purchase a $1,000,000 umbrella policy for around $200 per year so there is little reason not to have this additional protection.
Hopefully this article has given you a good handle on the complex issues related to this subject and provided some direction should you go down this path. As always, you are strongly encouraged to seek the advice of a lawyer and an accountant if you proceed and please don’t hesitate to contact us if you have any questions about this article.