I am considering the purchase of a boat that is titled in a Delaware LLC. I have completed sea trial and survey and we are preparing to close pursuant to the provisions of the yacht purchase agreement, but the broker suggested that I consider the purchase of the LLC itself. He indicated that this would allow me to avoid payment of California sales or use tax and to continue the liability protections that are available through LLC ownership. Can you offer some guidance as to the significant issues that I should be aware of in this type of transaction?
We are often asked to comment on the pros and cons of ownership of a boat by a corporation or LLC, and I will note at the outset that it’s not for everyone. However, before we get into the pros and cons of owning or buying a boat through a business entity – whether a corporation or LLC – we need to address a logistical issue raised by our reader.
He indicated that the parties are preparing to “close” the deal pursuant to the provisions of the vessel purchase agreement, but that he is now considering the purchase of the LLC that owns the boat. He needs to slow down a bit. If the parties close pursuant to the provisions of the vessel purchase agreement, the LLC won’t own the boat anymore, since the purchase agreement calls for the current owner to sell the boat to the buyer. The buyer would therefore own the boat in his own name rather than in the name of the LLC, and he would be purchasing a company with no assets.
If an LLC purchase is being contemplated, the parties should put the brakes on the vessel purchase – – – if that’s possible. At this late date the buyer is likely obligated to purchase the boat or risk losing his deposit for breach of the purchase agreement. This is therefore an element of a vessel purchase transaction that needs to be considered at the beginning rather than waiting until the last minute.
With these logistical issues in mind let’s take a look at the transaction itself. We should first point out that sales and use tax are essentially the same thing. Use tax is sometimes confused with the annual assessment of property tax, but sales and use tax are both assessed at the time of the purchase of personal property, and they are assessed at the same rate. The only real difference is that sales tax is assessed on the retail purchase of a new asset while use tax is assessed on the purchase of a previously owned asset.
In California, the purchase of a corporation or LLC that owns a boat as its sole asset is not subject to the assessment of sales or use tax (for the purposes of this discussion there is little difference between a corporation and an LLC). This is because sales and use tax are not assessed on the purchase of corporate securities or the purchase of part or all of a business entity.
The purchase of an LLC that owns a boat is exempt from the tax assessment because, when the business entity is sold, there is no change in the title or ownership of the company’s assets. Since the boat is still owned by the LLC, there is no purchase or sale of the boat and nothing to assess sales or use tax against.
This tax exemption works only when the LLC already owns the boat. Business entities are taxpayers like everyone else, and the LLC’s acquisition of an asset such as a boat will be subject to the assessment of sales or use tax unless it qualifies for an exemption.
We should also note that the ownership of a boat by an LLC as the company’s sole asset is unlikely to provide any special protection against legal liability. A “corporate shield” against personal liability may exist for a corporation or LLC that operates a legitimate business, but here we are talking about a company with no business purpose whose sole asset is a recreational vessel. In the event of a lawsuit against the owner of the vessel, a plaintiff’s attorney may be able to “pierce the corporate veil” and pursue the shareholders personally, as if the business entity did not exist.
Another logistical issue concerns the broker’s involvement in the transaction. In California, a broker who represents parties in the purchase and sale of a company or business opportunity must be licensed by the Department of Real Estate. A California Yacht and Ship Broker’s license is required for the sale of a yacht, but as noted above the yacht in these transactions is not actually being sold.
So, with all of this in mind, we can see that ownership of a boat by a corporation or LLC is not for everyone. As noted above it may provide a buyer with a tax exemption, and depending on your personal circumstances it may offer other benefits, but buyers and sellers should discuss the structure with their legal or tax advisors before proceeding.
David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (www.weilmaritime.com) in Seal Beach. He is certified as a Specialist in Admiralty and Maritime Law by the State Bar of California Board of Legal Specialization and a “Proctor in Admiralty” Member of the Maritime Law Association of the United States, an adjunct professor of Admiralty Law, and former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-799-5508, through his website at www.weilmaritime.com, or via email at firstname.lastname@example.org.