As you stroll through the docks looking for your dream yacht, you may have noticed many boats listed as “LLC Owned”. What’s the deal with that?
The answer is that by purchasing the LLC that owns the boat rather than making a purchase of the boat itself you can save a significant amount of money by avoiding California’s sales or use tax.
The State of California imposes a sales tax on purchases of personal property, including boats, collected by and through County Tax Assessors. California imposes a sales tax on the purchase of a new boat and a “use” tax on the purchase of a used boat.
A purchase of all or part of a business entity, however, is exempt from such taxation in California and in all other states. The purpose for such an exemption is to encourage economic growth. Wall Street would shut down if sales tax was imposed every time a stock, bond, or LLC membership interest was purchased.
California sales and use tax in San Diego County, effective April 1, 2019, is 7.75%. On a $500,000 boat that equates to a significant tax of $38,750. Thus, buying the membership interest of an LLC with its sole asset of a $500,000 boat saves $38,750 in taxes.
When the business entity is the owner of the boat there is no change in the title or ownership of the company’s asset, in this case, the boat. The only change in ownership is that of the LLC. Since the boat is still owned by the LLC there is no purchase or sale of the boat itself, and as such, no assessment of sales or use tax on the boat.
Keeping the boat in an LLC makes sense for a variety of reasons including liability protection if you put the boat out to charter, use it as an Airbnb, your office, or for commercial endeavors or for other tax deductions depending on its use, not to mention maintaining resale value.
A California LLC pays a minimum $800 payment to the Franchise Tax Board whether or not the LLC makes any profit.
The County of San Diego also assess a boat owner (in this case the LLC) a property tax of approximately 1.1%. Ownership is determined by whoever owns the boat on January 1 of each year.
As with the purchase of any business entity, you should have your attorney prepare a non-binding letter of intent with your proposed terms. You should also conduct a thorough due diligence to ensure the LLC has no liabilities or liens; understand any contracts the LLC has entered into, such as a slip lease, insurance, etc.; and review the LLC’s Operating Agreement and financial account records prior to the purchase.
Once you are have conducted your due diligence and you have agreed upon terms, your attorney should draft a Purchase Agreement for the LLC. Of course, the agreement should be contingent upon purchaser’s acceptance after a sea trial, haul-out, marine and engine survey and report. Once the LLC is purchased you will need to notify the California Secretary of State of the change in ownership of the LLC and of the any new domestic Statutory Agent for Service of Process. You will also want to open a financial account in the name of the LLC and purchase insurance in the name of the LLC. It is also likely you will need to have the LLC’s Operating Agreement re-written. You may change the name of the LLC as well by filing the name change with the California Secretary of State.
In sum, balance the tax savings against the administrative responsibilities when deciding whether to purchase a boat that is “LLC Owned.” If you are inclined to purchase an LLC which owns a boat as its sole asset, you should consult an attorney familiar with the intricacies involved early in the process.