Form an LLC for Charter Boat?

[muchmsw]

My girlfriend and I would like to purchase a boat and do some sailing in our retirement and are considering the following plan. I'd love any comments on the sanity check, is it doable, etc. Lifelong dream of a kid who started sailing at age 12.

We'd like to purchase a 1-2 year-old cruising catamaran and put it into charter service for 2-3 years to help defray the costs of the boat. We would be happy if the boat chartering breaks even -- that is, covers the charter costs and pays the loan. We have saved up a substantial (>30% of a ~40ft cat) down-payment, and believe that we can qualify for a loan on the balance; net worth, income limits, etc.

We plan on using the boat during times when it isn't being chartered. I have extensive experience chartering in the Caribbean and have recently qualified for my OUPV/6-pack licence. Obviously, the BVI is on our list of places we're considering, given the volume of business the companies there are able to generate.

My question is this: Does it make sense financially for us to form an LLC or perhaps a Corporation to "run" the charter business? Does anyone have any experience in this area? Specifically, does forming a formal partnership infer any advantages to help with costs such as travel, interest expense, etc. For example, can the corporation depreciate the value of the boat to reduce income taxes? Are any of the advantages to an LLC/Corporation that aren't available to an individual? I'm assuming we'll be working with a Charter company and set up our business using the "performance" model as opposed to the guaranteed return model

I've seen the references to sailonline.com and catamaranguru.com, but I wondered if anyone else had either direct experience with forming a corporation, or could point me to more detailed information on the subject.

TIA,
Steve

[Doodles]

I would recommend you find an attorney in your state to set this up for you. Yes, you need some business entity like a LLC or such since you and your girlfriend will be partners and are not a married couple. Find an attorney that does business formations and better yet one with experience in the charter business. Maybe the charter company can help you with a recommendation.

[s/v Beth]

We formed a LLC for our own protection, but if someone else is going to do all the chartering you don't need to. Also helps when you're accountant is trying to figure expenses for the boat.

[Doodles]

I got to disagree with you newt. Even if someone else is doing the chartering, since there is joint ownership of an asset and they are not married they need a written agreement of some sort to deal with the purchase, income, expenses, and eventual dissolution. Without an LLC or such, the IRS assumes a general partnership between the two and that can create a lot of open issues and unintended consequences.

[s/v Beth]

You know those guys better than I do. I am just going on my own experience with my boat. I am the first to state that I am not an expert with the IRS. Nor do I ever want to be..
I leave that for my accountants - who's advice keeps me legal.

[Ram]

It’s always a good idea to put your assets in an LLC, be it a rental home or boat or ect? - it protects & limits your liability and can even help to hide ownership, if you form a Trust--I see no downside to this – I personally own almost nothing, but I am managing partner in several LLCs & Corporations- You want to have at least 3 people in the LLC for Maximum protection ,less than 3 persons its easer to penetrate by the courts-and in my opinion is a waste of time- you can assign 1% to each of the other owners who will have no say over anything- this way if your sued and lose- the judge cannot force a sale of the vessel nor can anyone collect on any profit, because you are not the sole owner-

- as Managing partner you can decide to reinvest the profits every year if you were sued and lost- so even if you owe a large sum – for let’s say a big accident= you would never have to pay it – unless you sold the boat-and most lawyers would not pursue the case on a % basis, Because they know they’re not going to collect-

There are 2 views on Insurance, that go along with this, you ether load up & have a lot or have nothing at all, both offer about the same protection for you & the LLC-- Be careful with the IRS, you better really be in the charter business & be able to prove it, by showing your making a real profit otherwise it’s just a hobby to them.If the IRS even thinks your trying to pull the wool over them your gonna have real troble and may lose the boat along with your ass!

[denverd0n]

Originally Posted by Doodles

Even if someone else is doing the chartering, since there is joint ownership of an asset and they are not married they need a written agreement of some sort...

Yes, they absolutely need a written agreement of some sort. It does not, however, have to be an LLC. A simple partnership agreement can work.

The question, really, is what do you expect to accomplish with an LLC? If you hope to avoid liability, then you need to consult a very experienced attorney, who is familiar with the laws in every jurisdiction that you plan to operate. An LLC that will shelter you in the U.S. may very well provide no shelter at all in the BVI, or some other country.

As for taxes, in general an LLC does little to reduce the tax bite, but again, you need to consult an experienced attorney.

In the end, the very best advice that you really must heed is this... Internet tax and legal advice is worth exactly what you pay for it--NOTHING!

[Svan]

I own a boat that is in charter in a similar circumstance and motivations as yours. But you really need a tax-savvy accountant to advise you on whether this will help.

To my eye the biggest question is whether your down payment is siting in a corp or personal savings account. If corp, you will probably owe tax were you to pull the money out to yourself to buy the boat. Then an llc makes sense. The tax laws of your jurisdiction matter too.

So ask a pro