Should I Form a Corporation to Buy a Boat in Partnership?

If I buy a vessel in partnership with two of my friends and one of them gets in an accident, am I liable — as one of the owners — whether or not I am aboard? Should we form a corporation or an LLC to buy the boat?

This is one of those questions that lawyers really hate to respond to. There are simply too many variables to be able to answer the question with any certainty.

Who are the partners? What caused the accident? Why weren’t you aboard? What kind of partnership agreement is the ownership of the vessel subject to? Where was the accident? Was it a commercial boat with paying passengers?

These are a just a few of the questions that must be answered before we can evaluate a partner’s liability risk. We can, nonetheless, offer some generic advice that should be helpful to most of these transactions.

We should note at the outset that a partner’s ownership interest in the boat is always at risk in an accident, since a marine casualty will usually give rise to a senior maritime lien against the boat. Looking beyond a partner’s ownership in the boat, the personal liability of any partner is usually a concern only when the amount of the claim exceeds the value of the boat or the boat’s insurance policy.

Any question regarding legal liability may be analyzed by first asking whether there is an absolute bar to liability. Is there a rule or statute or strategy that will protect a party regardless of the circumstances of the accident? If not, do the circumstances of the accident offer a defense to one or more of the partners?

For a business entity, the operation of the business as a corporation or an LLC may provide an absolute bar to liability for the owners of the business, if the entity is properly formed and the owners observe various formalities relating to the operation of the business. Conversely, a conventional business partnership has unlimited liability. The partners are jointly liable for all debts and other liabilities of the business, and all the business and personal assets of the partners may be at risk in a lawsuit.

Owners of recreational boats often consider the formation of a corporation or an LLC for the ownership of a yacht. This may be a good idea, since it allows for a very structured relationship between multiple owners of a boat and it may allow the owners to take advantage of certain tax strategies.

However, the ownership of a yacht by a corporation or an LLC formed solely to own a recreation vessel will probably not protect the owners from liability for an accident. We addressed this question in a previous installment of this column (“Should I Form a Corporation or LLC to ‘Own’ My Boat?” in The Log, April 3, 2008), where we pointed out that a corporation or an LLC must have a legitimate business purpose if it is formed to protect its owners from personal liability.

Another avenue that can provide an absolute bar to liability for a boat owner is the Limitation of Liability Act. This is a federal statute (46 US Code sec. 183) that relieves the owner of a vessel from any liability if the owner had no “privity” or involvement in the incident. This rule dates back to the 19th century, and it was enacted to protect owners of merchant sailing ships who may not have had any contact with the vessel for several years.

Limitation is usually not available to recreational boat owners, since these boats are rarely away from the dock without an owner aboard. However, the reader’s question describes a hypothetical circumstance where one of the partners is not aboard, and that particular partner may therefore want to take advantage of the Limitation Act. Unfortunately, the partnership itself would probably be deemed to be the owner of the boat, and since all partners are liable for the acts of the partnership, the involvement of an individual partner would be irrelevant to the Limitation of Liability Act.

So, it is unlikely that a partner owner of a recreational boat will be able to take advantage of any absolute bar to liability to an injured party, regardless of whether the boat is owned by a corporation, an LLC or a general partnership. He or she will instead need to look to the circumstances of the incident itself.

Was the accident caused solely by operator error? If the operator was otherwise reasonably qualified, most or all of the liability for the error will probably stay with that individual.

Was the accident related to inadequate or negligent maintenance? If so, all of the owners may be liable, regardless of whether they were aboard.

The liability of any boat owner for an accident must be determined on a case-by-case basis. A boat owner who is concerned about these issues must be active and involved in all aspects of boat ownership. Choose your partners carefully, and establish rules for the operation and maintenance of the boat.

As noted above, the liability of an individual partner is really only relevant if the amount of the claim exceeds the limits of the vessel’s liability insurance coverage. Therefore, the most important risk management tool for any partner, or for that matter any vessel owner, is the purchase of adequate liability insurance and the compliance with all of the provisions of the policy.