Since we get so many questions about what kind of legal entity a person should use when setting up a boat sharing partnership, I wanted to take a moment to provide a brief outline of the some of the common choices using a scenario that was submitted to our forum this week, i.e., someone owns a boat with a mortgage, wants to share it, and is looking for the best way to set up the relationship. Some of the more common boat sharing structures are:
Boat sharing syndicate
Boat sharing partnership
Bareboat charter or lease
All of these options effectively boil down to a choice between the sale of an interest in your vessel to others, or maintaining legal ownership and leasing/chartering the vessel via the short, mid or long term. The first 3 options amount to a sale (a change in title) of part or all of your interest to another person or entity.
A word about syndicates: Syndicates can be formed as partnerships, LLC’s, corporations, or with no legal form at all (think crime syndicate). A syndicate is not a true legal entity – it is a group of people who have come together for a common interest – so in effect, all boat sharing arrangements are syndicates. Syndicates formed as general partnerships are problematic for boat sharing because general partners (persons with management and control authority over a partnership), are jointly and severally liable for the debts of the partnership – meaning they could be held responsible for a judgment if one of the other partners managed to seriously injure or kill someone. In my view, this makes any sort of general partnership a nonstarter for a boat sharing relationship. Syndicates formed as an LLC or Corporation. In this case, the boat would be transferred into the LLC or Corporation and each member would own some percentage of that company but not the boat directly. This is a better choice than a general partnership because liability is limited to the value of the vessel, and any other contributions made to the LLC or corporation i.e., the partners personal assets would be protected in the case of a catastrophic accident by one of the partners. The only thing that would be lost is the assets of the company – the boat.
Fractional Ownership I am not a fan of fractional ownership as it relates to boat sharing for our scenario because, as with the typical timeshare resort, once you relinquish proportionate ownership to others, no one can make fair decisions about what to do about the vessel, whether maintenance or use related. And, selling your interest becomes equally difficult, because buyers don’t want a proportionate interest, due to the associated uncertainty. I have seen fractional ownership scenarios work in managed commercial settings but for individuals attempting to share a boat they own, this would not be my first choice of entity. Changing the Title may be Impossible Anyway It may be impossible to sell a portion of your boat to another person or put it into an LLC anyway if you have a mortgage with a bank. The bank is unlikely to agree to the transfer and, even if it does, it will not allow its interest to take second position to the new owner/LLC/Corp – meaning the bank gets paid first and anything left gets distributed to the partners. Additionally, the bank could exercise it’s “due on sale clause” if you do the transfer without permission, which means that the entire loan balance comes due immediately. Leasing or Chartering A bareboat charter is effectively a lease — which in my opinion, is the best choice given the scenario presented, because (1) the owner retains ultimate control over the vessel, and (2) if someone doesn’t follow the rules or pay the rent, then the owner can terminate the lease agreement, and lease the property to someone else — or sell the vessel, and move on. Summary
These seemingly complex issues can be boiled down to a few issues/questions.
If you have a mortgage with a bank you probably can’t change the title – Bareboat charter / lease is your best option.
General partnerships are probably not the best choice for a boating arrangement because they create significant liability for all the partners involved.
Fractional ownership can be problematic because no one person has decision making control of the vessel and selling your interest can be difficult.
An LLC or Corporation allows for a good decision making structure, would allow partners to enter and exit fairly easily, and provides good insulation from liability, but can be difficult to get your boat into if you have a mortgage.
A bareboat charter/lease allows you to retain ownership and control and is probably the only option if you have a mortgage with a bank.