Most large yachts enjoy the benefit of company ownership
By Ian Biles
from an original article for The Triton
Most large yachts are owned by limited companies. These companies should not be confused with the trading companies that we see in the business marketplace; they are special purpose vehicles (SPVs) set up specifically to own and run a yacht.
A large yacht requires a great deal of day to day attention. Not only is there ongoing maintenance, but there are also issues such as safety, regulations and equipment, insurance, employment of crew, payday and all the other matters that keep a yacht functioning and ready to use at short notice.
The people who own these yachts do not have the time or the expertise to be responsible for every item and detail. Clearly, when purchasing equipment tools and spares the owner does not want to be the name on every invoice and to have to deal with all the payments or disputes. In the case of minor accidents and insurance claims, the owner does not want to be the person having to respond to claims and perhaps even a court case. If a crew member is dismissed, the owner does not want to be the person against whom a claim for unfair dismissal may be lodged. For these and many other reasons it is much more practical to use a company.
They therefore use a limited company and appoint professionals as directors. There is also the overall security of the limiting of liability afforded by a company.
Companies
I'm not going into too great of detail into the complexities of corporate law, but it is important to understand the basics, even if it is only to be able to ask lawyers the right questions.
A company is a legal entity and is recognized as such around the world. The shareholders are the owners of the company but they are not the owners of its assets or responsible for its liabilities. Their liability is "limited" to the value of their shares.
In the event of liquidation, creditors get assets before they do. If, however, there are insufficient funds to pay creditors, shareholders are protected from further claims against other assets (homes, for example). There could be actions taken if there is evidence of fraud, but in general the shareholders are limited in their liability to the nominal value of their shares.
Companies are incorporated under the laws of their particular jurisdiction; in the United Kingdon this is under the Companies Acts. These Acts of Parliament set out in detail how companies are established, the rights and duties of the shareholders, the officers and a whole host of rules concerning their conduct.
A company has a Certificate of Incorporation signed by the duly authorized Companies Registrar, which is proof of the company's existence. It will also have Memorandum and Articles of Association, which are bylaws of the company. These vary by company and country. It is important to check them: it is not unusual to find that the authority of one company to grant a Power of Attorney is not the same as another's. A company cannot do what it is not empowered to do the doctrine of "ultra vires."
One of the most common problems is figuring out who can sign on behalf of a company. Often an owner, not actually being a director, will sign for "his company." The problem will be that if there is a dispute, the lawyers may challenge the contracts and prove that whatever it was, perhaps the very purchase of the vessel was not lawfully done. The purchase would be invalid and the owner may well have lost not only his boat but also his money.
Corporate structure
A company is created when those who subscribe to its Memorandum and Articles of Association (bylaws) request the Registrar of Companies (or his equivalent in whichever jurisdiction) to incorporate it. The Registrar, provided he is satisfied with the documentation and the name, issues a Certificate of Incorporation which is proof of the company's existence.
On incorporation the company issues shares. It will, under its Memorandum of Association have an authorized capital, perhaps 10,000 shares of £1, but it can issue any number of shares from 1 to 10,000 at any value. Often, you will see companies with only two shares issued. Directors are appointed by shareholders to run the company and are not necessarily shareholders. Directors report to them, usually annually, by presenting accounts and financial statements. Directors can be dismissed by the shareholders.
Depending upon company bylaws, directors may be permitted to appoint more directors but are not normally entitled to dismiss directors, this being the prerogative of the shareholders.
Offshore companies
Many of these companies are established in "offshore" jurisdictions. This is not for any direct tax benefit or any particular wish to hide behind some anonymity, although these considerations may play a part. It is simply that such companies are more easily operated because of the absence of tax or, to use a more technical term, they are "tax neutral." There is a great deal of additional bureaucracy and administration required "onshore" in relation to tax and filing tax returns than there is in offshore locations.
These companies will often be administered through the offices of accountants, lawyers or specialist corporate service providers in these jurisdictions and will be simply one of a number that are operated by that firm.
Doing this reduces costs because it means the company does not have to directly employ accountants and administrators. These expenses would include staff holiday cover, secretarial costs, social security payments and pensions. By using a professional firm, the administration of the company is effectively rented by the hour.
There are a great many offshore financial centers around the world but in the yachting fraternity, particularly in Europe, the most important ones are the Isle of Man, Cyprus, Malta and the Channel Islands. Further afield are the Cayman Islands, British Virgin Islands and Panama. There are many others; this is not an exhaustive list.
Many ownership vehicles exist. The traditional limited company has shares and directors and is organized under the Companies Act in its own jurisdiction and is controlled by its own bylaws, which are modeled on historically straightforward law. There are also limited partnerships, trusts, limited liability companies and hybrid companies. Essentially, they create an SPV which will own the vessel and which can be used to contract for anything from its building to the audit of its safety systems, surveying, registration and employment.
In some cases, the SPV is used only to own the yacht and another company is set up to employ the crew and deal with the charters.
Normally, the company will have its own bank account which will be funded directly or indirectly by the owner.
The professionals, who are the directors, will be the signatories to the account. They will meet and pay all the routine costs. Most of these costs will be approved directly or indirectly by the owner in conjunction with the captain and, if there are shore-based managers, the managers too. How these companies operate will depend entirely upon the degree to which the beneficial owner wishes to become involved in its daily administration. In some cases, all routine maintenance will be delegated to the captain or the engineer and the safety and ISPS regulations dealt with by the shore-based manager. In other cases, the owner may require that every invoice is faxed or mailed for his approval. The companies may also handle the credit cards that are used by the captain and engineers.
When the yacht is not being used by the owner, it may go out on charter. Again it will be the company which will do the chartering. In many cases, the ownership of the vessel will be segregated into a company that has no other activity. An operating company, which will be responsible for all of the issues surrounding the yacht, will be established and will operate in a different environment with different people. The object is to separate the functions of ownership and activity; it may also reduce financial risk by involving more people and controls.
These companies do have to comply with local law and with regulations relating to the preparation of accounts and differing levels of disclosure. In some jurisdictions it is not necessary to disclose directors, and in other jurisdictions not only must you disclose the directors and other officers, but also the shareholders. In some cases accounts may need to be published.
While it is difficult to estimate or give an approximate figure for the cost of these companies, it is reasonable to say that the set up cost can be from $5,000 and the annual fixed costs are likely to be in that range.
If the vessel is within the European Union, then there is the question of VAT. If she is not commercially registered or if she is a private vessel that is operating commercially, then VAT is an issue that needs to be considered on the charters. Clearly, it is not practical for the owner to be a VAT registered trader which is another reason for using a company.
The choice of jurisdiction for the company will depend upon a number of issues, not least the tax implications of that jurisdiction. Where you have the British crown dependencies, they all have the right to fly a British flag, but they have varying degrees of regulation relating to yachts. The Cayman Islands and the Isle of Man, for example, have their own highly developed shipping registers whereas the Channel Islands have a register but it is not suitable for large commercial yachts. The Isle of Man is part of the European Union VAT regime whereas the Channel Islands, Cayman Islands and other places further afield are not. Malta and Cyprus, having joined the Union, are now other jurisdictions which have a VAT status within Europe.
Anonymity
The "veil of incorporation" separates directors from shareholders (executives from investors) and it can disguise the actual beneficial ownership.
Nominees are registered shareholders who act on behalf of others; a nominee is a bare trustee. In very many companies it is easy to "recognize" nominees but it is difficult to identify their client. The reasons for hiding one's involvement are not normally sinister (or tax-related) and may include: Being a high-profile or celebrity person; source of funds being other than the user (e.g. family trust); concern over security, kidnapping, etc.; avoidance of being named in spurious claims joint ownership.
Trusts
Trusts are a particularly Anglo Saxon concept that date back to medieval days and they are very different from companies. To begin with companies are recognized around the world as a legal entity but this is not always the case for trusts.
A trust is created when one person, the "Settlor", hands the legal ownership of assets to "Trustees" and requires them to hold those assets for the benefit of a third party or parties, the "Beneficiary". The Settlor loses both his legal and beneficial interest in the assets. The Owner of a company may receive a dividend; a Settlor cannot receive anything under a trust. (It is possible to create a trust under which the Settlor is also a Beneficiary but this is beyond the scope of this course.)
Trusts are often used to create the holding entity of a company; the assets of the trust will be the shares in the company. This is often done to distance the individual from the actual ownership of the company to add both security and anonymity.
Corporate ownership is the most practical way of dealing with the routine administration, bureaucracy, commercial and financial considerations that are part of the package of owning a large yacht.
Ian Biles is the founder of Maritime Services International, a marine surveying and consultancy business. He holds a Class I (Unlimited) Master's certificate and developed a risk management program for large yachts for a London-based underwriter. Contact him at info@maritime.uk.com or +44 (0)2392 524490.
