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Don G
#1 Posted : Sunday, June 16, 2013 5:41:34 AM(UTC)
Don G

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I have a boat that I'm thinking of sharing with a number of other people. It is a relatively expensive vessel and I'd like to protect it and myself. I can't find a good overview of the different possible legal entities/agreements I could use and why I might choose one over the other.

I see that there are at least 4 common ways to do this.

1. Boat sharing syndicate
2. Boat sharing partnership
3. Bareboat charter
4. Fractional ownership partnership

Are there any other possibilities? As I said, I'm just in the beginning stages of this process and am trying to understand each one of those possibilities (and any others you might find) and why I might choose one over another.
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Socrates R
#2 Posted : Sunday, June 16, 2013 6:39:22 AM(UTC)
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In my view, all of the options effectively boil down to the 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.

A syndicate is a partnership. The only difference is that a partnership is defined as "an association of two or more persons to carry on a business for profit." Whereas a syndicate or association (which may be formed as an Limited Liability Company, or as a private mutual benefit corporation) does not require a profit motive.

General partners (persons with management and control authority over the partnership) are jointly and severally liable for the debts of the partnership. This can make your liability huge, if one of your associates manages to seriously injure or kill one or more persons. For me, this makes any sort of general partnership a nonstarter.

Whereas if an LLC or corporation owns the vessel, then your liability is limited to the value of the vessel, and any other contributions made to the LLC or corporation.

However, as you already own the vessel, unless your associates are prepared to purchase your interest at its fair market value, then you will be effectively gifting the property to the LLC/corporation, which could be a very costly choice.

Concerning fractional ownership, in my view, this is the worst possible choice, 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.

Concerning bareboat charters, this is effectively a lease -- which in my opinion, is the best/only real choice, because (1) you retain ultimate control over the vessel, and (2) if someone doesn't follow the rules or pay the rent, then you terminate the lease agreement, and then lease the property to someone else -- or sell the vessel, and move on.

You know the old saying, "The second best day in a yacht owner's life is the day the vessel is purchased. The best day is the day that the yacht is sold!"

Hope this helps.
Don G
#3 Posted : Sunday, June 16, 2013 6:43:18 AM(UTC)
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Thanks for the great info - Just trying to understand this fully.

1. Would I face the "gifting" problem with a partnership/syndicate? That is, would I still be putting the boat into that entity and partners would then have to buy in and if they didn't or couldn't pay fair market value, I would be gifting them part of the boat? Or, can a boat partnership/syndicate be formed without putting the boat into it?

2. Do both partnerships and syndicates (because they are a partnership) face the problem of the general partner being subject to such extreme liability? And, is there always a de facto general partner, i.e., me because I own the vessel?

3. Re LLC/Corporation, if I have a mortgage on the boat would the bank have to agree before I could put the boat into the LLC/Corp?

Thanks!
Socrates R
#4 Posted : Monday, June 17, 2013 5:08:30 AM(UTC)
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1. Would I face the "gifting" problem with a partnership/syndicate? That is, would I still be putting the boat into that entity and partners would then have to buy in and if they didn't or couldn't pay fair market value, I would be gifting them part of the boat? Or, can a boat partnership/syndicate be formed without putting the boat into it?

A: A transfer of property with no payment of fair value in return is a gift. However, for tax purposes, if you receive anything in return for your gift, then that transforms the transaction into taxable income for both the transferror and transferee. Examples:

1. You set up an LLC and you fund it with the title to the vessel. Now, the LLC has an asset value of $1,000,000, which is the fair market value of the vessel. There's no gift, because tax law permits you to transfer assets to fund a business entity. You give your best friend a 20% interest in the LLC. That's a gift, because you expect nothing in return for the 20% interest.

2. Same facts as above, but your friend agrees to pay you $1,250 per month for 360 months at 5% interest. Your friend has purchased his/her shares, and you have received $232,852.02 -- $32,852.02 of which is taxable income (which can be reported as installment income as received, or reported entirely in the first year of the transaction).

Concerning the gift scenario, this doesn't mean you will be taxed on the gift, because everyone has a $5,250,000 lifetime gift tax exemption. But, if your vessel is very costly, then that will eat into your exemption, and reduce your estate tax exemption for your heirs upon your passing. If you don't think you will ever amass more than $5 mill in assets during your lifetime, then you have nothing to worry about. Otherwise, once you pass the exemption limit, you will owe 35% tax on every dollar transferred.

2. Do both partnerships and syndicates (because they are a partnership) face the problem of the general partner being subject to such extreme liability? And, is there always a de facto general partner, i.e., me because I own the vessel?

A: A "syndicate" is not a true legal form. You may as well just say "partnership. Everyone is liable in a general partnership. If you own the vessel, then your partnership doesn't include the vessel. The partnership is only based upon the use of the vessel, but to the extent of that use, it may represent taxable income to both you and the partners.


3. Re LLC/Corporation, if I have a mortgage on the boat would the bank have to agree before I could put the boat into the LLC/Corp?

A: Yes. The bank won't allow its interest to take second position to the LLC/Corp, even if it agrees to the transfer -- and the bank could state that if you make the transfer, then it will exercise its "due on sale clause" in the promissory note, which means that the loan balance is due immediately.
Don G
#5 Posted : Monday, June 17, 2013 7:58:34 AM(UTC)
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One more (hopefully final) question on this - could a legal partnership be formed for a boat share without having a boat in it? That is, in this scenario I would still own the boat but me and my three boat sharing partners form a partnership which governs our use of that boat. Would there really be any reason for that kind of partnership to be formed or would it be better just to call it a bareboat charter and be done with it.
Socrates R
#6 Posted : Monday, June 17, 2013 8:00:09 AM(UTC)
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If your vessel is berthed in a state that doesn't charge annual fees on LLC entities, then I would talk to the bank about transferring ownership to the LLC, and see if they will agree to not call the loan. That way you will have liability protection in case someone runs the vessel into someone/something else. Or, I would create an offshore legal entity to own the boat. Then I would let that entity charter the vessel to the other parties. That way, any income and expenses and liabilities are collected in the entity, you're not generating any net income, so you don't have tax liability, or liability for injuries caused by a charter, except for the value of the vessel, which you can insure against, if you choose to do so.

That's pretty much a bareboat charter by your LLC/Ltd, and it simplifies the accounting issues. If your charters don't pay the fees for the vessel then you just terminate the charter agreement with them and find someone else.

Hope this helps.
Don G
#7 Posted : Monday, June 17, 2013 9:55:19 PM(UTC)
Don G

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One last point of clarification one of my partners asked - you say when you hear syndicate, think partnership. But you also say a syndicate can be formed as an LLC/Corporation.

I'm taking this to mean that a syndicate is just a description of a group - i.e., there is a group that wants to get together to share a boat - And, that group (the syndicate) can get together as a partnership, LLC, corporation, what have you. Each of those have their own issues as you have pointed out, but from a legal standpoint when we are talking about a syndicate we are really talking about one of those other entities - does that sound right?
Socrates R
#8 Posted : Tuesday, June 18, 2013 8:28:26 AM(UTC)
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That's right. A syndicate has no legally distinguishable form. Partnerships, corporations, LLCs, and associations are distinguished by a legal definition and associated enactments found in the statutory law of each U.S. jurisdiction. You won't find the term "syndicate" presented in any legislative enactment, because it's a colloquial business term -- not a legal term.

If a syndicate is formed for profit, then it's legally a partnership; if it's formed for a reason other than for profit, it's legally an association (n.b., in some U.S. jurisdictions, the term "association" is also not legally defined -- leaving nonprofit organizations with the requirement that they form as a corporation, because there is no other option).

Syndicates are frequently associated with media (newspapers, tv networks, etc.) and criminal enterprises -- because, ironically, a syndicate, if its membership comprises a substantial percentage of a particular market, probably violates federal antitrust laws -- as the goal of a syndicate is generally to fix prices among members.

Note: There may be a legally distinguishable syndicate form in a foreign jurisdiction, which could be applicable to admiralty (law of the sea) -- but, I'm not aware of any.
Stephen E
#9 Posted : Thursday, August 8, 2013 9:46:55 AM(UTC)
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I came across this thread and had a question regarding the bareboat "lease" option. We are attempting to charter someones boat, actually it's a charter with purchase on the end, meaning all of the payments submitted go towards the purchase price. The issue is that the owner still has a mortgage on the boat and one of the clauses in his mortgage is that he needs permission from the bank to charter long term. My question is what does the bank need in order to give him permission?
John D
#10 Posted : Friday, December 13, 2013 5:12:45 PM(UTC)
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We have just revamped our sample contract section with new partnership/syndicate and bareboat sharing agreements. Even if you have an existing agreement, having a look at these may give you some solutions to common problem areas.

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Socrates R
#11 Posted : Friday, December 13, 2013 5:54:46 PM(UTC)
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Regarding Stephen E's question, what is the term of the charter? A very long term charter might be tantamount to a sale from the banks prospective but because there is no actual sale (thereby not evoking the due on sale clause) the bank might add this requirement to insure it knows if a very long term charter is being created. Similar to the banks reasoning behind the due on sale clause, the bank may not have a lot of incentive to agree to a very long term charter.

Notwithstanding the long term charter issues, it seems to me that what you are describing is a sale with the boat owner holding the note which would probably violate the due on sale clause anyway.

I would contact the bank, let them know what you are planning and find out what you're options are directly from them.
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