I get calls all the time from boat owners who want to form a corporation or limited liability company – and transfer their boat titles – to improve their tax situation.

My typical response is to ask them "why?"

Setting up a corporation is simple. Service companies are in every phone book and do-it-yourself books are in every book store. But you should start by asking yourself whether you really have anything to gain by taking title in the name of the company.

Most boat owners should think twice before titling their recreational yacht into a corporation. The advantages of corporate boat ownership may be limited, and the cost of forming and maintaining the corporation from year to year may be prohibitive. This is not to say that corporate boat ownership is never advisable. Every circumstance is different, and a boat owner who is considering this question should consult his or her own tax and legal advisors for more information.

ANYTHING TO GAIN?

Corporate (or LLC) ownership may, under some circumstances, offer you three possible advantages: Liability protection, tax savings and privacy. As a general rule, however, few boat owners are in a position to benefit from any of these strategies.

When it comes to liability, my advice to most recreational boat owners who want to title their boat in a corporation is simple: Forget the corporation, and use the money you would have spent on that process to buy more insurance.

Corporate ownership of a business is a great idea. It allows the company's shareholders to operate the business without fear of personal liability, and it allows for the seamless transition of ownership.

The development of the corporate form of ownership in the 19th century helped fuel the industrial revolution and the economic growth of our country. What does that mean to boaters? In a maritime context, if a boat is owned by a charter business, the owners should consider incorporating the business. But corporate ownership was not created to shield the owner of a recreational asset from liability. It is likely that a corporation with no business purpose will be disregarded in the event of a lawsuit, and the shareholders will be forced to defend the suit themselves.

A boat owner who titles his boat in the name of one of these "hollow shell" corporations may be at a loss for words and money when his injured passenger ignores the corporation and files suit against the boat owner himself.

TAX SAVINGS

There are three different tax issues to consider: income tax, the assessment of sales tax on the purchase and the annual assessment of personal property tax.

In California, the ownership of a boat in the name of a corporation or LLC will have almost no effect on the assessment of sales tax or on the annual assessment of personal property tax. I say "almost" no effect, because there are two narrow avenues where corporate ownership may be of some help.

One option involves the transfer of a boat into a newly formed corporation. In California and most other states, tax is not assessed on the transfer of certain assets by the shareholders into a new corporation or LLC in exchange for stock in the company. This may provide some benefit to individuals who already own a boat, since they can transfer their existing boat into a newly-formed company without worrying about sales or use tax. This, however, provides little help to someone who is considering a purchase, because the exemption applies only to an exchange involving assets that the shareholder already owns.

The other option involves the sale of the corporation itself to a new owner. The sale of corporate stock – whether for a large corporation or a small company with one shareholder – is exempt from the assessment of sales or use tax. I am sure the various state tax agencies would love to tap into the billions (or trillions) of dollars of stock that are bought and sold every day, but the Securities and Exchange Commission might have a problem with that. In any case, both of these options for avoiding sales or use tax are extremely complicated and a tax professional should be consulted before pursuing either approach.

CHARTER BUSINESS

Of course, depending on your situation, there may be some income tax benefits to corporate boat ownership, but your tax advisor will likely tell you that some form of business enterprise must be related to the operation in order to keep it legal. If the rule didn't exist, people would be forming corporations to write-off all of their hobbies. Try, if you will, to envision corporations for stamp collections and bowling teams.

One possible avenue for income tax benefits may be to establish a charter business with the boat. That said, tax rules for chartering are very restrictive and, again, a tax professional should be consulted. Regardless of the accounting details, if you claim to use your boat for charters, you better be able to prove that you use your boat for charters. And, your charter project will require adherence to Coast Guard regulations, which apply to everything from the construction of the boat to the hiring of a captain, and you may need to hire a maritime attorney.

There is one tangible benefit to corporate ownership, and that is privacy—if you plan to document your vessel with the Coast Guard. The Coast Guard maintains a database of American flagged vessels, and the name of the owner of any boat is readily available on the internet. Some states (such as Delaware) do not include the names of a corporation's directors or officers in the public record of a corporation. Therefore, if a boat is documented with the Coast Guard and owned by a Delaware corporation, only the name of the corporation is made public. This may be an attractive option to celebrities and other owners of "high end" boats.

If your boat is registered with the state, however, the rules may be different. Roughly half the states shield marine registration records behind privacy laws—but the rest do not.