There are many similarities between a seamen respecting the sea, not taking unnecessary risks and how you expose your self to risk in business, if not thoughtfully considered the captain may risk going down with the ship.
Businesses in the Marine Industry, while governed by the same rules and regulations as other general businesses, operate in their own peculiar commercial realm requiring legal needs to be tailored to fit. From the owner operated mobile shipwright through to the large dealerships buying and selling large vessels these businesses operate in an economy that is not only seasonal but when the economy crashes the boat account is the last to be paid if at all.
The significance in understanding this business seascape is that creditors (those providing funds, services or materials) all in essence provide credit that may or may not be given with out some sort of string attached, which if your business is a company you may be asked to sign a personal guarantee despite the company being the party the contract. On the other hand if you are a sole trader, which most small business are as the debtor you are already personally caught.
Therein lies several questions that should to be considered; does the structure of your marine business fit your needs now? in the future? and does this fit with the business environment?
This article cannot provide the definitive answer in all cases but will go some way to assisting the business owner to asses their own circumstances, ultimately resulting in more questions requiring answers.
Not unlike those questions asked when choosing a vessel some issues to be considered when choosing a business structure are establishment costs, exposure to risk/liability, tax benefits, the business needs and ultimately business succession.
Considering the sole trader first this structure allows the owner to:
- have full control of the business;
- be entitled to the entire profits of the business;
- be entitled to sell or to discontinue the business;
- close the business with minimum legal cost.
However, the owner must balance up these benefits against being exposed to all liabilities for the business debts. With this structure the owner is exposed to the risk of being sued for debts the business cannot pay, remembering the economic vulnerability of the industry due to seasonal change and economic down-turns, and ultimately facing personal bankruptcy in the most extreme cases.
Other problems the individual owner may find are:
- the work won on contract may be limited to small jobs as his business may lack credibility when compared to larger repair businesses that are formed under a company structure;
- relying upon his/her own management skill;
- business loans are more than likely be secured against a family home.
Before, commencing the business under this structure the owner should consider where the business wants to be in the future as the sale of the business to a new company structure may require the payment of Capital Gains Tax. Additionally, who’s name the all important family home or vessel is to be held under. If held by the other person in the relationship, whose not connected to the business the asset will be protected however, this decision must be made before the business is commenced or as soon as possible, not when the legal storm approaching.
The risks in a partnership is even more complicated and while there are many benefits such as: shared business systems, increased capital and machinery and shared experience. Along with shared legal, administrative procedures and costs of formation of the partnership being relatively inexpensive, some disadvantages are:
- each partner is joint and severally liable for debts and the conduct of each other in the business;
- There is potential for disputes and breakdown in the mutual trust between the partners rendering the business unworkable and damaging business reputation;
- The partners are not a separate legal entity requiring the participation of both partners for many legal transactions.
A partnership can avoid many of the potential problems by entering into a partnership agreement from the start that covers everything from ownership percentages, conflict resolution through to issues of succession. Further, at this early stage the partners should consider whether a company structure would be more prudent given the tax benefits and other benefits as discussed further in this article.
Depending, on how the partnership is structured through the agreement the question of risk is much higher. Not only are you liable to the business losses but also to the any expenses incurred by the other partner. With all parties having access to expense and bank accounts it becomes very interesting when the partnership sours, you certainly learn the true calibre of your partner.
Finally, where sole trader-ships are relatively simple to dissolve, in a partnership where termination is due to a dispute there may be considerable legal and other costs incurred.
Marine ventures will often need considerable capital expenditure and the best structure would be a company. Under this structure directors are generally protected from debts incurred by the company, provided they have not given personal guarantees or breached their duties under the corporation act.
Listed here are some of the advantages a corporation structure:
- perpetual succession (until wound up or dissolved) and this continuance is not affected by the death or withdrawal of shareholders. Therefore, the owners of the business/company can more easily divulge themselves of there interest.
- considerable flexibility in the organisation, management and financing of the corporation, as:
a) share capital can be raised due the large number of shareholders while partnerships are generally restricted;
b) shareholders can have varying entitlements to dividend and control;
c) if the corporations grows in size it may be listed on the stock exchange;
d) subject to compliance with statutory requirements funds may be raised from the public.
- Shareholders generally have limited liability and are not liable for the debts of the corporation.
Furthermore, one of the main advantages of the corporation structure for the directors is it provides a business structure whereby, provided they are not in breach of the corporation act and their director duties or responsibilities, the directors can ‘hide behind the corporate veil’. That is, provided no personal guarantees are given, the corporation will bear its losses and not the director.
However, while it can generally be said that finance from banks etc is easier to obtain, where less sophisticated corporations require finance often company directors are required to personally guarantee bank loans, leasing agreements, and rental contracts, rendering ineffective the protection afforded by the corporate veil. Therefore, while at the time the signing of a personal guarantee may seem innocuous at the time, often it’s the little debts that all add up to create cash flow problems.
While, there are some disadvantages in utilising the corporate structure, especially if the business is small, this structure is the best structure for protection from risk. Even though there are increased cost and the structure will be more complex to form and maintain in terms of legal, auditing, accountancy and administration, the benefits in conducting business for example where contracts will be entered in to with large corporations far outweigh these negative concerns.
In all three business structures there are pros and cons that need to be considered before a final decision is made, talking to a business savvy commercial lawyer who is familiar with the marine industry, a good accountant and financial advisor, your bank manager, your family and any other relevant party before heading into the wild blue yonder of your marine business is where your journey should start. These discussions may alter your path considerably with respect to the future and while the future is difficult to foretell the planned course that is set will more than likely result with you avoiding risk and ending up at the required port of destination.