Here’s how to make your yacht an LLC and reap the financial benefits—as long as you pay close attention to the requirements.
If, like Chief Brody in Jaws, you decide, “You’re gonna need a bigger boat,” some simple strategies can help you purchase the yacht you’ve always wanted. We can all agree that a yacht is an expensive toy, but it can also be a business that qualifies for business tax deductions and financial planning benefits. That’s something to consider for anyone looking to upsize their boat to something yacht-sized.
Purchasing your new yacht through a limited partnership or limited liability corporation (LLC) is one way to accomplish this and without the hassle of dealing with a foreign jurisdiction. It has been done successfully by many, and it’s perfectly legal as long as it’s done correctly. Here’s how to make your yacht an LLC.
Here are some important steps to follow:
Establish a business entity to own the yacht
It may seem complicated, but it’s actually a fairly simple process you can do online or with the help of an attorney. Once you’ve established the business entity, you can coordinate the purchase of your new yacht by the business.
Arrange for financing
Financing your vessel purchase may be a challenge with this structure if you plan to use traditional sources of financing. Like all vessels, yachts depreciate and leave borrowing options through your new business entity somewhat more restricted, but that doesn’t have to be a roadblock. Consider an alternative, more cost-effective means of borrowing the funds, such as securities-based lending. With a securities-based loan, you don’t have to liquidate your investment portfolio to raise the cash necessary to purchase the yacht or satisfy deposit/collateral requirements. In addition, when you borrow from your investment portfolio or utilize your own cash, you can essentially loan your new business the money (and you set the loan terms). In short, you become the lender and the borrower.
Setup a business plan
Identify and estimate the total ownership costs and set up your company to function as a yacht charter business. Determine how much it will cost to dock your yacht versus operating at sea. Estimate all costs including fuel, captain and crew, maintenance, insurance, and other fees depending on the type and use of the vessel. Ultimately, you are trying to determine how much your business will need to charge (what you will personally pay the LLC) to “charter” your new yacht. Establishing reasonable charter rates is an important step in maintaining this as a viable business entity. Basically, you’re figuring out what you would have to spend anyway but charging users (yourself) a charter fee. Operating as a business enables you to take advantage of perfectly legal business deductions.
In addition, here are some tips to consider:
You absolutely must stay organized and maintain adequate records of your business’s operations. Effectively accomplishing this requires that you maintain the integrity of the business enterprise as separate and distinct from you, personally, through obvious and independent arms-length transactions.
This structure requires filing a separate tax return for your new yacht charter business. It also means separate bank accounts and separate financial records. Compartmentalizing is absolutely necessary lest you want a date with the Internal Revenue Service.
You don’t necessarily have to charter your yacht out to strangers, but there are some business strategies you should consider. For example, you can make your business even more “official” by having a website or listing your yacht for charter. What matters most is that you set a charter rate that will at least cover the operating expenses plus a modest profit margin. As you know, no business plan would be viable or reasonable with perpetual projected losses.
There are many other things to consider before going down this path. This strategy might seem a little complicated, but if you play by the rules, the pros should outweigh the cons. If you’re still unsure, an experienced financial advisor can help you evaluate all the nuances of your unique situation. It is also important to discuss this with your accountant, one with significant experience in advising clients with complex needs and knowledgeable about strategic planning for those with higher incomes and asset values.
How to make your yacht an LLC
The bottom line is that establishing a charter business to with your new yacht can be an effective way to more efficiently manage the total cost of ownership. Who knows? Maybe you can work and play at the same time.
By Christopher Ure, Southern Boating
