9 Tips when starting a charter business
SAFE CHARTERING SERIES
Starting a charter business the right way
Whether you own a boat or know someone who does, creating casual profits through day charters can be enticing, but don’t be fooled by perceived simplicity.
Across a variety of different marine charter applications, I’ve learned the musts when operating any above-board charter business. This ranges from your 2-person engagement cruise to multi-vessel, multi-day choreographed promotional programs for major global brands.
I decided to write this post after seeing how many people expose themselves to unnecessary liability. Don’t count on this post as your bible, just use it to realize how easy it is to break the rules if you don’t care about them.
Before you set out for your maiden commercial voyage, set yourself up for success by understanding your risks.
NOTE: This post is written specifically for those seeking to turn their private vessel into a day charter business, and the rules and regulations affiliated.
Tip 1: You vs. Your Company
Like any business, do your best during incorporation to reduce or remove your personal liability. Whether you own or rent the vessel(s) in use, liability will come at you from all angles as the orchestrator of the charter experience. Its easy - especially with luxury day charters - to get caught up in the fun and forget just how many things can go wrong. Incorporating the correct entity (i.e. LLC vs INC) and establishing your activities as an incorporation rather than under your personal name is step one to limiting liability.
Tip 2: Understand Sales Tax Law
By reading the title, you might assume Tip 2 was focused on paying sales tax. Quite the opposite. Knowing your tax law - whether in-state or out-of-state - can be a significant cash benefit in the high stakes game of boat charters.
A few years ago I was operating an entity established in Florida, which accepted a six-figure summer contract in New York. Since we’d never operated there, our responsibility to collect sales tax on the contract depended if/when we had established “nexus” in New York. You obtain nexus in different ways in different states, and in our circumstance, it was the moment we accrued $250,000 in gross revenue as an out-of-state operator. With the total contract under $250,000, and therefore not establishing Nexus, our client saved $9,600 in local sales tax.
With an asset class able to “float” from state to state (and sometimes country to country), knowledge of tax law in new markets can help you sell attractive packages and enter new markets. Moral of the story: beyond collecting and remitting sales tax in your state, be aware of varying sales tax amounts based on location of service.
Tip 3: Bareboat vs. UPV
Never leave home without knowing the difference when enjoying or executing a day charter.
A bareboat charter is where the client takes full responsibility of the vessel. This requires the charter client is responsible for hiring the crew, providing food & beverage, fueling and trip planning. The key component to any “bareboat” is the provision of the vessel in a bare format. The charterer is then responsible for all activities required to execute the charterer. Bareboat is a popular format for day charters, although its legal requirements prevent most from executing them legally. Read more on the troubles of bareboat chartering in a separate article.
A UPV charter (or “crewed charter”) has a separate set of legal requirements, and is short for “Uninspected Passenger Vessel”. In a UPV format, the vessel staffs its own crew, can provide provisions and control the vessel’s logistics.
Where Bareboat and UPV charters primarily differ is in the eligibility of vessels. Any vessel may utilize the Bareboat format, while a UPV charter must use a vessel built in the United States OR a vessel with a Small Vessel Waiver (otherwise known as a MARAD waiver through the Passenger Vessel Services Act)
For Small Vessel Waiver Eligibility, a vessel must:
be owned by a U.S. citizen or organization,
be at least (3) three years old,
intend to carry passengers only,
carry no more than 12 passengers at a time when in service, and
satisfy a series of separate U.S. Coast Guard requirements
In addition to receiving the Small Vessel Waiver, you must abide by guest count restrictions based on your vessel’s gross tonnage, have DAPI-compliant crew and the vessel meets the safety requirements of 46CFR Subchapter C.
Tip 4: Know Your Contracts
I’ve seen the same templated bareboat charter agreement used by countless brokers looking for a quick deal, yet they don’t have any awareness of what’s on the paper. That’s not to say the template isn’t acceptable, but usually if a USCG officer smells smoke, he/she can find fire. As an example, the bareboat contract prohibits the owner from being on board and especially to captain the boat, nevertheless, I see owners who run their own boats to 1.) save money, 2.) because they don’t trust any captains, or 3.) just because they like it. Unfortunately, its wrong, and is a costly mistake.
Regardless of the contract you plan to use, its important to know them back and forth, because USCG officials will quiz you, your crew and your passengers to make sure everything is buttoned up.
Tip 5: Focus on the Flow of Funds
Especially for those operating via a bareboat contract, there are rules surrounding the flow of funds which must be followed to retain the integrity of the agreement. You’ll recall from Tip 3 that the bareboat agreement is a complete (yet temporary) ownership takeover of the yacht. The client has full right to select its crew, and therefore, pay its crew. While the vessel owner is entitled to its vessel fee, they should not be collecting or distributing funds on behalf of the crew. This would illuminate the vessel owner’s involvement with the crew, nullifying the bareboat charter agreement and leaving you exposed to fines and penalties. The client should be paying one fee to the vessel owner and a separate fee to the presiding crew. Keep in mind that separate crew payment should include any gratuities offered. The flow complicates a step further if there is a broker involved, who will likely collect the funds and distribute them accordingly.
If you ever find yourself in circles about what’s right and wrong, just focus on the bareboat agreement’s main concept: The vessel owner shall have no command over the vessel or its crew during the charter period. If operations follow this simple guideline, the flow of funds will fall in line.
Tip 6: Cover Your A** (Insurance)
While a lot can go wrong during a bareboat charter, there are two insurable interests you need to prepare for: loss of vessel and guest negligence. Since the client is fully responsible for the vessel during charter, any dings, damages or breakages are their responsibility. This is something you’ll want to alert the client of before they sign their agreement. Its not a nice moment when the captain runs the boat into a wall, the client doesn’t realize they are the one hiring the captain, and therefore, the one responsible for the damages. The only remaining insurable interest of the vessel owner is a full loss event; something that puts the boat at the bottom of the lake. In this case, the owner’s insurance must cover commercial operation, or risk complete loss of asset. If you’re brokering the charter, cover your company for your client’s negligence. Should someone slip and fall off the boat, you’ll want to shield yourself from financial liability with a policy in the seven figures. Any good insurance company will make your guests sign a liability waiver before stepping on board, further limiting your liability in just about any negligent scenario. Don’t look past this as an inconvenience. The waiver is for your protection.
Tip 7: Don’t Assume Everyone Else Follows the Rules
Just like you have a laundry list of liability to mitigate in starting your new charter business, EVERYONE ELSE DOES TOO. Unfortunately, not everyone is aware enough to read tax law and consult a professional before they head out on a day charter to earn big revenues and cash tips. If you’re using someone else’s boat, keep a copy of their current registration and commercial boat insurance on hand. Make sure the captains you’re hiring are dually licensed, insured, and have never had a loss on their record. I keep copies of all the above and more whenever I’m operating charters. You never know who will call, and having the information readily available shows you know what you’re doing and keeps your associates on top of their business. If you’re ready with the right answers, you’ll look prepared, even if you’re not. And that’s half the battle.
Tip 8: CAPTAINS… They’re Available For A Reason
Once the boat leaves the dock, the experience is out of your hands. So, hire the right crew.
In South Florida, captains are a dime a dozen, although you will need to sift through the crap to find someone who provides a great service and who you can trust. You’ll find good captains are either always booked or they’ve just taken a full-time gig on a new boat. With the Covid-era introducing more new boat owners to the world than ever before, demand for captains is at an all-time high. If you ever find yourself stressing for a last minute captain on a weekend or holiday, remember, he/she is available for a reason. Find someone you like and take care of them. Give them more than just a “captain gig” and you’ll garner commitment and someone you can trust.
Tip 9: SAFETY. SAFETY. SAFETY.
I don’t just mean that because you’re on the water, its also a legal requirement.
All charter boats MUST have on-board items like a throwable floatation device, valid flares, USCG approved lifejackets, a noisemaker, a rules of the road USCG handbook, and of course, the valid documentation for the charter. Operating your business safely includes preparation to make sure you don’t get that 11:00PM call on New Years Eve that your boat has expired flares and a broken navigation light.
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