Boating: Business AND Pleasure?
December 7th, 2021
Boating is one of America's favorite hobbies. We all long for that enjoyable day out on the water. What many people do not know is that boating can also be a business as well. Every boater seems to have at least one friend who went through the added effort of owning his or her boat through a company as opposed to owning it personally and some even know of a friend who has flagged his or her boat with an exotic foreign registry. The reasons for doing this are far from the whim or paranoia of the boat owner. Rather, these people have realized that while boating is undoubtedly a fun past time, there are significant potential legal liabilities involved with boat ownership that also make it a smart idea to treat boating as a business.
While boating should always remain predominantly a pleasurable experience, it is helpful to keep in the back of your mind that the boat itself can also be a floating liability. In the event of an incident or loss involving your boat, the boat itself is liable in rem (latin for "against a thing") for the damages caused. This unique aspect of admiralty law means that the boat itself can be sued for damages caused to property or third parties. A claimant's traditional remedy is to request a court order to arrest the vessel and have it sold at auction to satisfy the claim or debt. If the amount of liability exceeds the value of the vessel and/or the owner's insurance policy limits, it is a near certainty that the owner will be sued personally for the excess liability. This unnecessarily exposes a boat owner and his or her other assets to personal liability for claims against the boat.
The potential of liens against your vessel is made more daunting by the fact that admiralty liens are often referred to as "secret liens". When you hear this term used, people knowingly or unknowingly are referring to the fact that admiralty liens do not necessarily need to be recorded in order to exist. Rest assured, this risk can be mitigated with simple planning and awareness. By forming a limited liability company or other similar company and consulting with an experienced admiralty attorney, an owner can create a level of insulation between themselves and the vessel thus limiting potential liability. This careful planning will limit an owner's exposure and keep boating pleasurable.
In addition to practical legal concerns such as those mentioned above, owners may have other reasons to form a company to own a boat. The most common personal reason we see is that people prefer to be anonymous as they cruise the Intracoastal, local lake, or their other favorite cruising grounds. In many states it is easily accessible public information to see who owns which boat. The mere fact that an owner has formed a limited liability company does not mean that he or she has protected their personal information from the general public. Even if owners make the wise decision to form a company to own their boat, many states publish information on directors, officers, and registered agents of companies, thus allowing an inquisitive general public a means to find out who owns which boat.
A simple search on the division of corporations website for each state can produce personal information on business owners. There are also a number of pay websites from which this same information can be obtained. For this reason, many of the owners we represent will choose States that do not publish information on shareholders, directors or officers. Some of the more popular choices include Delaware or Nevada for more complete anonymity.
Finally, you may notice a number of different colorful flags other than the United States flag on vessels in your local marina. Some of the more popular foreign flags include the Cayman Islands, Marshall Islands, St. Vincent, and the British Virgin Islands. It is important to remember that foreign flagging of privately owned vessels is not done solely for the purpose of legal avoidance of sales tax. Oftentimes there are other very practical reasons for this. Upon initial consultation with our new clients, our typical first questions are "where do you intend to cruise?" and "what do you intend to do with the boat?" Depending on the type of vessel and amount of charter you wish to do, a U.S. flag may simply not be a practical option for your vessel. Likewise, charter desires and cruising grounds often dictate a foreign flag. Your boat does not necessarily need to be the biggest or most expensive boat in the marina to make foreign flagging a wise option.
Many owners considering a foreign flag are concerned about their ability to cruise in the United States. Foreign flagged vessels are allowed to cruise in U.S. waters under the rights and protections of a cruising license. This license allows the holder to cruise U.S. waters with the same rights and protections as those of a U.S. flagged boat. While license holders are required to clear out of the United States once a year upon expiration of the cruising license, the owner can again obtain a new cruising license upon their return to the US.
In conclusion, nobody, least of all us as admiralty attorneys, want to take the fun out of boating. With careful planning and consultation, boating can operate in a business-like and limited liability manner while also remaining enjoyable.
*The information offered in this column is a summary in nature and should not be considered a legal opinion.