Many buyers decide to take ownership of a vessel through an entity, the most common being a limited liability company, but sometimes through a corporation or limited partnership. The primary reason for owning a boat in a company is liability protection. Most savvy buyers form a separate entity for each individual asset, including large vessels, the idea being that the owner can limit its liability to the value of the assets in the company. A common question from potential buyers is, “Where should I form my company?” In recent years, it has become more important to pay attention to where an entity is formed in relation to where the vessel is registered.
Traditionally, where an owner registers their vessel and the domicile of the owning entity were unrelated. You could form an entity in one state and register your boat in any other state without any extra costs or steps. Recreational-boat owners often used, and continue to use, Delaware entities, regardless of where a vessel is registered, due to the ease and speed of formation and the privacy it offers to owners.
However, in recent years, the rules of vessel registration in some states have started to change. More specifically, certain states are requiring companies formed in another jurisdiction to be registered in their state before they will allow vessel registration. This doesn’t necessarily mean that a company must be formed or domiciled in that particular state, but it must either be authorized to do business within that jurisdiction, or perhaps obtain some form of business license or identification number.
In Florida, all out-of-state entities must be authorized to transact business in its state before a vessel can be registered. The agents in many of the tax collectors’ offices will search their database with the Division of Corporations to ensure that entity is authorized to conduct business in the state of Florida. If not, the applicant will be turned away, even if they have a check in hand ready to pay the sales/use tax.
The unusual thing about Florida is that the laws didn’t change. Rather, the state adjusted the application and enforcement of the same rules. Even more unusual, some tax collectors’ offices require an entity to be registered in Florida and others don’t care. The lack of consistency makes it difficult on owners, documentation agents and attorneys.
In New Jersey, entities domiciled outside the state must obtain a Motor Vehicle Commission Entity Identification Number before they will allow vessel registration. This requires the owner to file an application for an MVCEIN along with supporting corporate documents. This particular application process does not come with an extra fee, but it can take a couple of weeks to receive an assigned number.
Why Are States Doing This?
An entity is formed or domiciled in only one state, but companies are required to also register to do business in each jurisdiction in which they are active. This process is typically called foreign entity qualification. Traditionally, such qualification was reserved for companies with a physical presence in a particular state or those that were legitimately transacting business within its borders. However, it appears that some states, especially Florida, have expanded those rules to include companies that simply own a vessel.
It is hard to know the reason behind the change in enforcement in Florida, but I suspect it simplifies record-keeping, and it also creates another source of revenue. And for that reason, I expect other states to follow.
Why does it Matter?
There is an initial and an annual fee for each state in which a company is registered. While the cost is not exorbitant—typically between $100 and $300 per year in each jurisdiction—it adds up over the years. Even more important is the extra time it takes a vessel owner to register and maintain an entity in multiple states. Registering an out-of-state entity in another jurisdiction can take several weeks to process, which also delays vessel registration for the owner.
Certain states might offer income tax or other benefits, but from the standpoint of cost and practicality, it is often easier to form an entity in the state where the vessel will be registered.
Raleigh P. Watson is a contributing author, and a Partner at Miller Watson Maritime Attorneys.