From a young age, Kostas Pappas felt comfortable on water, and spent his childhood fishing and sailing. Now in his 40’s, Kostas owned a successful party boat business, including several large yachts and other boats. His party boats were docked around Manhattan island, and he launched cruises for celebrations, tourist outings and fancy corporate affairs.
One day, while supervising his crew loading cases of Champagne for a wedding cruise on his yacht “Tiger”, he noticed City Sheriffs seize the boat in the next slip, a party cruiser like Kostas’, owned by his competitor Aristotle. Aristotle explained that on a “Sweet Sixteen” cruise, a teenager snuck some alcohol onto the boat, got drunk and fell overboard. Although she was rescued, suffered no physical injury and was, in fact, responsible for her own underage drinking, her parents sued Aristotle for negligence, alleging that he failed to properly supervise the teenagers on board, and for violation of the “Dram Shop” law. He lost the lawsuit and was ordered to pay $3 million to the plaintiffs, yet his insurance coverage was only $2 million, and the insurance company was challenging paying even that. To satisfy their judgment, the plaintiffs then went after Aristotle’s personal assets. Aristotle’s boat was owned by an S-Corporation, which he thought would limit his liability. But the plaintiff’s lawyers attached his shares of the S-Corp, thereby now owning his company and the boat.
Kostas was stunned by Aristotle’s horrible turn of events. He came to see us because he understood that the same thing could happen to him, and he wanted to protect himself ahead of time.
First, we addressed the boats themselves, Kostas’ main assets and the sources of any primary liability. We noted that all of the boats were personally owned by Kostas. Therefore, he could expect to be personally named on a lawsuit arising from an accident on any of the boats. We set up a new Limited Liability Company (LLC) to own each boat. Thus, the yacht known as “Tiger” was now owned by the Tiger LLC. Kostas would own most of the membership interests in Tiger LLC, with smaller LLC interests owned by Kostas’ children. We specifically did not make Kostas the sole owner of each LLC because single-member LLCs are “disregarded entities”, often ignored by courts. By placing each boat into a separate LLC, we severed Kostas’ personal liability from an accident arising on any boat. By placing each boat in its own LLC, we segregated the boats from each other; thus, litigation and possible judgments concerning the boat “Tiger” would be contained to the Tiger LLC only, and would not endanger any other assets.
For an additional layer of asset protection, we then transferred all of Kostas’ LLC membership interests into one Family Limited Partnership (FLP). The FLP acted as a “holding company”, owning all of Kostas’ various LLC interests in the LLCs which owned the boats. Pursuant to state statute, the assets owned by the FLP cannot be attacked by Kostas’ personal creditors.
In addition to asset protection, the FLP also gave Kostas significant tax benefits. Over time, Kostas would gift limited FLP interests to his children, ultimately lowering the taxable value of his estate. He would always keep the general FLP interests, thereby always controlling the FLP and the assets owned by the FLP. Since his children were in lower income tax brackets, the income earned from the boats would be spread among them in proportion to their limited FLP interests and would thus be taxed at their lower income tax rates.
Next, we addressed all of Kostas’ other personal assets. We placed his home into another FLP. We transferred his bank and brokerage accounts into yet another FLP. Kostas owned several valuable collectible cars and motorcycles, and we also placed them into a separate FLP. In the event of a lawsuit against Kostas, each asset was now protected. In the event of a lawsuit in connection with his party boat business, his personal assets were safe and each boat was protected from a lawsuit against any of the other boats. If he were to be sued personally, all of his business interests were likewise separate and secure.
We then examined how his business operates, from the captain and crew of each boat, to the catering and concessions for party cruises, to the contracts signed by the clients who charter each boat. We understood that liability might arise at each point, and we addressed each potential threat.
Having already placed each boat into its own LLC, we created a new LLC, Cruiseline Charters LLC, which would be the business entity that charters the boats to the customers. We drafted a master vessel lease agreement between each boat owner (LLC) as lessor, and Cruiseline Charters LLC, as leasee. We replaced Kostas’ old customer agreements with new charter contracts between the customer and Cruiseline Charters LLC. Thus, Cruiseline received all charter fees from customers and paid almost all of that income to the LLCs. Cruiseline had no other assets. If a cruise passenger was to get injured, her recourse would be against Cruiseline Charters LLC, and not any of the LLCs, nor Kostas personally.
Recognizing that the provision of food and beverages, especially alcohol, might give rise to yet more liability, we separated the concession and catering part of Kostas’ business by creating a new entity, Cruiseline Concessions LLC. We required all charter customers to sign a separate catering agreement with Cruiseline Concessions LLC. Thus, if a passenger drank too much alcohol, slipped and fell, she could try to sue Cruiseline Concessions LLC, but Cruiseline Charters LLC (the boat charterer), Tiger LLC (the boat owner), and Kostas Pappas (the secure and protected business owner) would be in a very strong position to have any lawsuit against them dismissed.
We even anticipated the drunk passenger attempting to sue the captain and crew of the boat. We therefore created a new entity, Yacht Personnel LLC, the business entity that would provide personnel services directly to the charter customer, not to any LLC, Cruiseline Concessions LLC or Kostas. Thus, all potential threats were isolated and contained.
Business was good and Kostas bought a Rolls Royce to pick up important clients and bring them to the dock. We created yet another LLC to own the car and further limit any liability, and we put the membership interests of that LLC into Kostas’ holding company FLP.
A month later, Kostas watched the crew load more Champagne onto “Tiger” for an upcoming Bachelorette party. Kostas decided to keep a bottle of 2002 Krug Champagne for himself, to drink that night and toast his business success, confident that his business and personal assets were completely protected.