A CORPORATION - TO BE OR NOT TO BE?
By Allen E. Graham

Small business owners, like charter boat owners/operators, periodically consider the following forms of entities when setting-up or establishing their business: sole proprietorships, partnerships, LLC's, or corporations, with the ultimate goal being to protect their assets. The creation and existence of these entities is not governed by maritime law but by state law. An attorney from your state should be consulted to assess the requirements, costs, pros and cons of each type of entity and choose the one best suited for your small business. The pros and cons of each type of entity may be summarized as follows:

Sole Proprietorship: This entity is the type most charter boat owners/operators follow either by election or by default. With a sole proprietorship, there is no formal separate entity recognized by state law and the vessel is owned and operated by the individual. All income from the business venture is reported as income of the individual, with the business expenses deductible by the individual. This form of business entity is simple, with no expense required to create or maintain the entity. With a sole proprietorship, there is unlimited liability on the part of the owner/operator, individually, for the debts, obligations and liabilities of the business including any accident related liability.

Partnership: A partnership is created by an agreement between two or more persons to operate a business for profit. A partnership has minimal creation and maintenance costs, as even an oral agreement between partners can constitute a partnership in some states. However, attorneys usually recommend that partnership agreements be in writing and any amendments or modifications to the partnership agreement also be made in writing. The taxable income of the partnership flows directly through to the partners. The partners are individually taxed on that income. There is no federal income tax levied on the partnership as a separate entity, but a partnership is required to compute taxable income in the same manner as an individual. Each partner bears unlimited liability for all debts, obligations and liabilities of the partnership, even accident liabilities.

Corporation: A corporation is a more expensive entity to create and maintain. It requires the preparation of Articles of Incorporation, along with By-laws and shareholder meetings, conducted to create and maintain the corporation as an entity. Shareholders elect a Board of Directors who set corporate policy and appoint officers to manage the affairs of the corporation. Corporate franchise taxes and filing fees are imposed by most states. A corporation is a separate legal entity which must pay income tax to the federal government. Earnings after taxes are paid to the shareholders in the form of dividends and the shareholders must pay income tax on the dividends received. The taxation of income to the corporation and dividends to the individuals create the "double taxation" situation which makes a corporation, as a form of business entity, less desirable. Subject to some limitations, the effect of double taxation can be limited by paying salaries and bonuses to the shareholders if the shareholders are also employees of the corporation. The primary benefit of a corporation is that shareholders are afforded limited liability for the debts and obligations of the corporation, with such liability limited to the amount or value of the shareholders' particular investment in the corporation. This limitation on shareholder liability promotes investment, particularly when the investor or shareholder does not control the company's day-to-day operation.

Limited Liability Corporations: A Limited Liability Corporation or "LLC" is a separate legal entity created by investors, known as "members", adopting Articles of Organization and an Operating Agreement. The members must determine whether the organization is member controlled or manager controlled. The operating agreement sets policy and sets forth how the members and/or managers are required to manage and control the entity. An LLC is low in maintenance costs since most states do not require annual meetings. The member's liability for the debts, obligations and liabilities of the LLC is limited to the amount of the member's particular investment, yet the income of the LLC flows through the entity directly to the members who are taxed on the income less a proportionate share of expenses. An LLC is the most flexible, simple and inexpensive entity to maintain, and provides the most asset protection to non-management participants of the business entities discussed.

For the individual owner/operator of a charter vessel who is also the captain of the vessel, CEO and/or manager of the entity, the form of entity for owning and operating the vessel may not provide any real limitation on the individual's liability. The largest potential exposure you will have is liability for personal injury, death, or significant property damage caused by the vessel and/or crew in the event of an on board accident or collision. If you are the captain of the vessel at the time of the incident, you will likely have individual exposure for the casualty and be personally named as a defendant in any suit for the recovery of damages. In other words, the fact that the vessel may be owned and operated under a corporate name, LLC or partnership will not shield you from liability for your own individual negligence in operating or maintaining the vessel. The primary way to protect yourself, your home and your assets from liability for vessel related accidents and casualties is through the purchase of insurance. By diligently following safe maintenance and operating procedures, adequate insurance is of utmost importance in protecting yourself and your asset(s) in the event of vessel related casualties, regardless of the type of entity employed in owning and operating the vessel.
Good luck and safe boating!