Sailboat on blue water

Should I Form a Delaware LLC to Purchase a Boat in California?

Sailboat on blue water

Should I Form a Delaware LLC to Purchase a Boat in California?

A client asked if it would be a good idea to form a Delaware LLC to purchase a boat in California. Delaware law does offer strong protections for LLCs, but as always, there is more to the story. A discussion of the steps involved, and some considerations follows:

  1. If your wish to create a Delaware LLC, start by paying the Delaware Filing fee and any service or attorney costs associated with filing.
  2. Hire a Delaware Statutory Agent for Service of Process – Delaware law requires that every business entity have and maintain a Registered Agent in the State of Delaware who may be either an individual resident or business entity that is authorized to do business in the State of Delaware. The registered agent must have a physical street address in Delaware.
  3. Pay Delaware’s Annual Franchise tax of $300 – Although Limited Partnerships, Limited Liability Companies and General Partnerships formed in the State of Delaware do not file an annual report, they are required to pay an annual franchise tax of $300.00. Taxes for these entities are to be received no later than June 1st of each year.
  4. Prepare an Operating Agreement that allows your LLC to purchase asset in another state, lease a slip, purchase insurance, and conduct business in another state.
  5. If you are only purchasing the boat and conducting no other business in California with the Delaware LLC, you may be exempt from registering with the California Secretary of State as a foreign LLC doing business in California.California Corporations Code sec. 17708.03 states:
    1. A foreign limited liability company that enters into repeated and successive transactions of business in this state, other than in interstate or foreign commerce, is considered to be transacting intrastate business in this state within the meaning of this article.
    2. Without excluding other activities that may not be considered to be transacting intrastate business in this state within the meaning of this article, activities of a foreign limited liability company that do not constitute transacting intrastate business in this state include all of the following:
      1. Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement of those, or the settlement of claims or disputes.
      2. Carrying on any activity concerning its internal affairs, including holding meetings of its members or managers.
      3. Maintaining accounts in financial institutions.
      4. Maintaining offices or agencies for the transfer, exchange, and registration of the limited liability company’s own securities or maintaining trustees or depositories with respect to those securities.
      5. Selling through independent contractors.
      6. Soliciting or procuring orders, whether by mail or electronic means or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts.
      7. Creating or acquiring indebtedness, evidences of indebtedness, mortgages, liens, or security interests in real or personal property.
      8. Securing or collecting debts or enforcing mortgages or other security interests in property securing the debts and holding, protecting, or maintaining property so acquired.
      9. Conducting an isolated transaction that is completed within 180 days and is not in the course of a number of repeated transactions of a like nature.
  6. If you are going to use the boat as an Airbnb or lease the boat out for bareboat charters, or conduct any other business activity with the LLC, you must register with the California Secretary of State as a Foreign LLC Doing Business in California. Use Form LLC-5 and pay the $70 filing fee . You will also need a Certificate of Good Standing from Delaware. California’s annual minimum $800 Franchise Tax will have to be paid no later than April 15 each year even if your LLC makes no profit. See California Revenue and Tax Code sec. 17941.
  7. With the Registration with the Secretary of State you will also need to prepare and file a Statement of Information regarding ownership of the Foreign LLC with the State of California and obtain, and register, an Agent for Service of Process in California.
  8. You will need to open an account at a financial institution and fund the account so the LLC can purchase the boat, pay costs incidental to the purchase such as vessel registration with the California DMV or documentation by the US Coast Guard, purchase insurance, and lease a slip. Be aware that some financial institutions will not open an account for a foreign LLC that cannot show proof of registration of the foreign LLC with the California Secretary of State.
  9. Be sure to purchase the boat insurance with the LLC as the named insured – If your boat burns and the LLC that owns the boat is not the named insured, your insurance carrier may deny coverage. Likewise, if you have not registered your Delaware LLC in California your carrier may deny coverage, claiming that your Delaware LLC was operating in California illegally.
  10. Be aware that California Courts may not provide you with the protections afforded by an LLC if it is not registered in the State of California as a foreign LLC. A California Court could hold that your LLC was involved in more than just one isolated transaction and as such, your Delaware LLC is operating illegally in California without registration, and the LLC protections will be disregarded.

Other options include forming a California LLC to purchase the boat or, rather than using an LLC as a liability shield, purchase the boat as an individual and secure adequate insurance for your activities.

Be sure to carefully read your boat insurance policy and understand what is covered and what exclusions to coverage may apply. Are there exclusions for damages arising from collision with a log or a whale? Are there exclusions for running aground or being in Mexico during hurricane months? Are you covered if someone you charged a fee to stay on your boat for a weekend stay causes a fire?

Michael Wales is a Maritime Law Attorney in San Diego, California. Mike also owns AGL Yacht Sales, Inc., a San Diego Yacht Brokerage, with his wife Leilani Wales. For assistance with any maritime legal matter you may contact Mike at mwales@waleslaw.com or at 619.493.1700. For information on brokerage boats please visit www.aglyachts.com.