Benefits of Holding Commercial and Recreational Vessels in Limited Liability Companies
Apr 24, 2020
“Is setting up a limited liability company worth the time and expense?”
“Doesn’t it seem shady, will it complicate my efforts to document my vessel with the U.S. Coast Guard?”
Rest assured, creating a limited liability company to act as an ownership entity for your vessel is a great idea. It is easy to do, and far from being shady, it is actually the more financially prudent and socially responsible choice for any vessel owner. The U.S. Coast Guard will not suddenly suspect you of tax evasion or gun-running if you choose to document your vessel in the name of a limited liability company.
The following article will address the benefits of using a limited liability company to hold a vessel. This article is equally applicable to recreational vessel owners, commercial fishing vessel owners, and charter boat owners.
Many vessel owners are unsure if it is necessary or even helpful to own their vessels through limited liability companies, rather than holding the vessel as a personal asset. The truth is, using a limited liability company as an ownership vehicle for a vessel is the responsible thing to do for anything from a small passenger vessel, to a commercial fishing vessel, to a superyacht. Setting up and maintaining a limited liability company has never been easier, with many states now providing online filing services. The fees associated with establishing and administering a limited liability company have also dropped. For example, in Washington it is possible to set up a limited liability company online for less than $300 in filing fees. Typically, the limited liability company formation documents will be processed and officially recognized by the Washington Secretary of State in less than 48 hours. When considering spending hundreds of thousands, if not millions, of dollars on a new vessel it is always wise to spend the comparatively small amount of time and money necessary to set up a limited liability company. The potential savings are enormous and more importantly, the risks of not having a limited liability company can be financially ruinous.
All vessels, regardless of their use, present an unusual concentration of risk.
Indeed, for many recreational vessel owners, some amount of risk may be part of the attraction. All the same, the prudent owner should take steps to minimize the scope of their risk. By owning a vessel through a limited liability company, the owners can cordon off the risk created by their ownership and use of a vessel and ensure that other assets or aspects of their lives are not implicated should the risk of vessel ownership manifest in an accident, injury, or loss of any kind.
Consider, for example, the owner of a mid-sized personal recreational vessel, which is held personally by the owner. The owner takes some friends out for a day trip, and wanting to entertain his guests, lets one of them briefly pilot the vessel. Of course something unexpected goes wrong, and someone is seriously injured. Though the owner carries insurance, his insurer refuses to provide covered on the basis that the owner, the insured, was not actually operating the vessel at the time of the incident. Because the owner did not hold the vessel through a limited liability company he is now personally liable for all the medical costs incurred by the injured party.
Alternatively, consider an owner who operates a commercial fishing vessel, a limit seiner in Southeast Alaska, and another commercial fishing vessel, a gillnetter, in Bristol Bay. Both vessels are held personally by the owner and not in limited liability companies. Under such an arrangement both vessels are open to seizure by the owner’s creditors. This could result in a nightmare scenario wherein an indebted owner’s vessels are seized by creditors, depriving the owner of the only means they have to pay off the underlying debt. If the owner’s vessels were held by one or more limited liability companies, the owner’s creditors would not have access to the limited liability company’s assets. This would allow the owner to continue using the vessels to ensure any outstanding debt was eventually paid down, rather than filing for bankruptcy.
While owning vessels through a limited liability company does not free the owner from the responsibility to obtain insurance or pay taxes, limited liability company ownership is still a very helpful means of limiting liability. Considering how easy it is to set up a limited liability company, there is no reason not to use one.
As the name suggests, the main benefit of using a limited liability company is that they allow members to limit their liability.
If a vessel is owned by a limited liability company, liability for incidents involving the vessel flow to the company itself, instead of its members. When a vessel held by a limited liability company is involved in an accident that leads to litigation, an injured party would need to sue the limited liability company that holds the vessel. The limited liability company members personal assets are shielded from creditors of the limited liability company and conversely, the limited liability company’s assets (usually the vessel) are shielded from creditors of the owner. If a limited liability company is properly structured, creditors of a member cannot force the sale or seizure of the limited liability company’s assets. Generally, creditors are only able to obtain a charging order from a court which directs the limited liability company to divert its income to the creditors, rather than distributing it to the indebted member. A charging order does not allow creditors to access limited liability company assets directly.
The liability protection provided by a limited liability company is not unlimited or unconditional. The liability shields provided by limited liability companies were designed to protect businesses and not private individuals. Therefore, courts can “pierce the corporate veil” and hold the members of a limited liability company personally liable if they determine that the limited liability company serves no legitimate business purpose. Also, if assets are transferred to a limited liability company after the owner of those assets has a creditor, a court could construe this as a “fraudulent transfer,” intended only to shield assets from creditors. If a court determines that a transfer was fraudulent, and intended only to shield assets from existing creditors, the court can allow creditors to recover those assets.
In order to ensure that a limited liability company provides the maximum amount of liability shielding, limited liability companies must be operated in every respect as a separate entity from the owner. When administering a limited liability company, members must treat it as its own legal entity. This means taking steps to ensure that the limited liability company’s accounts and a member’s personal accounts are not used interchangeably; for example, a member should never use limited liability company funds to pay for personal expenses. Limited liability company funds should not be intermingled with personal funds. If a loan is made to the limited liability company by one of the members, it must be treated as a normal loan, even if the individual is effectively loaning money to themselves in a single member limited liability company. Convincing a court to pierce the corporate veil is very difficult, especially when the limited liability company member or members have been diligent about treating the limited liability company as a separate legal entity. If the members operate and administer a limited liability company correctly, any would-be litigant will face a very heavy evidentiary burden to convince a court that the limited liability company is a sham. This type of litigation is costly and time consuming. This fact alone will deter many would be litigants.
In addition to liability protection, limited liability companies can also offer anonymity.
For example, limited liability companies formed in Delaware are not required to publicly disclose the identity of member’s and managers. Again, this anonymity is not complete. A court or tax authorities can order the limited liability company to reveal its membership under certain circumstances. Despite this, the anonymity protections provided by Delaware limited liability company laws are quite beneficial. As with piercing the corporate veil, the high cost of legal fees and court costs required to obtain a court order revealing the identity of limited liability company members will dissuade many potential litigants.
In conclusion, vessel owners of all kinds should consider the benefits of owning their vessels through a limited liability company. The cost of setting up a limited liability company is small and the administrative obligations for the members are minimal. Anyone planning to purchase or build a vessel should contact a competent business attorney to quickly set up a limited liability company and draft an operating agreement designed for a company meant to hold ownership of vessels. This should be considered as just another part of the purchase process for any vessel. Finally, vessel owners considering using a limited liability company to hold their vessel must be sure that the inform their insurance provider and are sure to transfer insurance coverage to the limited liability company that holds the vessel.
The next article in this series will address the use of Trusts, both in the United States, and in offshore jurisdiction, as an alternative ownership vehicle to limited liabilities companies.
About the author
The International Maritime Group (IMG) is a boutique law firm that provides tailored legal services to businesses, financial institutions, and governments. Our firm has a reputation for solving complex legal problems—on time and under budget. Our aim is to always be more than just our clients' attorneys, but their trusted advisors as well.