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The Business of Boat Building
Legal Considerations- Statutes & Regulations
Production and Operations Management
I am not an attorney. I am an
engineer. This is not legal advice. Only a lawyer can give you legal advice.
All of the following is based on my own experience and education. It is very
general in nature. Many laws concerning running a business vary from state to
state. It is your responsibility to find out what the laws are in your state or
city. Any errors or omissions on my part do not relieve you from your obligation to
operate your business legally. Where possible I have put links to web sites that contain
information about the subject. However, you should consult an attorney for specific
details of the laws applicable where your business is located. What is said here applies
only to the USA. If you are in another country you need to talk to someone who knows
the laws in your country.
Contracts: Most beginning boat builders don't even want to think about contracts. But they need to in order to protect themselves. If you take an order to build a boat you need to get the customer to sign a contract for the order before you ever begin to buy materials or begin construction. The reason is simple. With a gentleman's agreement, that is, a hand shake, the customer can back out of the agreement at any time, leaving you with all of the costs. You need to get it in writing. Many builders have been left with a boat that the customer decided they didn't want or couldn't pay for. If this happens you would have to find someone to buy the boat to recover your costs. With a contract, your case will be very strong if you decide to take the customer to court to recover your costs. This does not have to be a formal contract. It can all be on the order form. But both parties need to discuss and know what they are agreeing to.
Things to put in the contract.
What boat is to be built and who will build it. Where it will be built.
Are there to be any changes from the published description of the boat? What are those changes? Did the customer pay a deposit??
The agreed price. How it will be paid? Up front? In installments? Half now, half at delivery? Establish the details so the customer can't put off paying you.
The agreed delivery date.
The agreed place of delivery.
Who will pay for transportation if the customer requests the boat to be delivered to a location other than the factory.
Note requirements if the customer wants to make changes. How the price will be negotiated for the changes.
Cost overages: How will any cost overages be paid and by whom.
Any other negotiable items.
The days of a gentleman's agreement are unfortunately behind us. That ship has sailed. You have to protect yourself and your business.
Liability If you built it, and something is wrong with it, that injures or kills someone, you may be liable. What does that mean? It means you may have to pay damages to the injured party. You will more than likely get sued. This is based on the principle of strict liability which, simply put, says that the builder is liable for any defects in his product. The best way to protect yourself is through liability insurance and to make sure you build to known accepted industry standards. You must build to the standards found in Federal regulations. That's the law. But, you have an option whether or not to build to ABYC standards or some other accepted standard such as ISO or ABS, or Lloyds to name a few. In the USA most courts use ABYC as the de facto standard. That means that most manufacturers use ABYC standards and accept them as the benchmark of boat construction. However, if you don't build to standard and something bad happens, you will probably be found liable. Building to a known standard is good protection against liability. It is not 100% protection but helps your argument that the problem was completely unforeseen. If you normally build to the standards and for some reason don't follow the standard on a particular boat or item on a boat, you should document your reasons why. Keep a file on each boat sold. If you change something, note it in the file. Put in why did you built it that way, how you built it, and why it is a better way to build. This is for your own protection.
Insurance: Insurance is expensive and everybody knows it. Still if you build a product and sell it to the public it is cheaper to have insurance than to have to pay a large settlement. So you should have liability insurance. If you decide to have employees, you will also need to have liability insurance to cover on the job accidents.
Environmentalconsiderations: The EPA has regulations that apply to boat manufacturing. Such things as dust collection, reduction of styrene emissions, and use of products containing chemicals that pollute the environment are enumerated in the regulation. Some of these apply to everybody. Some do not apply to businesses under a certain size. There is information about this on the EPA web site, and on NMMA's web site.
To incorporate or not. A company owned by a single person is known as a sole proprietorship. You as the owner are responsible and liable for everything. You can be held personally responsible for debts, liabilities and anything that happens to your customers because of your product. But for many small businesses this is the way to go. You have complete control over the business and all of the assets and profits are yours to do with as you please.
If you take a partner (two or more owners) the same rules apply except everything is divided up equally, or according to how much each partner has invested in the company. If you have a partner you need an agreement in writing, defining each partner's share of the business and their responsibilities. You also need to state who has the authority to do what. You most likely don't want your partners selling their part of the business without your permission. But if it's not in writing they can. So spell it out. Especially spell out who has fiscal responsibility. Who handles the cash. Who has access to bank accounts, pays the bills, can purchase materials, etc. You probably want to require that all partners must agree to any expense, beyond routine things such as ordering materials and supplies. Most disagreements in partnerships are over money and how the company is managed, so get it down in writing. Get an attorney to sit down with you and your partner or partners and put it all down on paper. When it's done, everyone has to sign the partnership agreement and have it witnessed. It would be good to have it notarized. This will protect you from someone who could sell out and disappear with the cash. You need to do this even if the company is family owned! It is actually much easier on everyone if they know what their responsibilities are.
Should you incorporate? Incorporation has advantages. There is what is known as a limited liability corporation that gives you some of the benefits of a full corporation but without the complexity. Incorporation creates an entity which is your company. The company then takes on all the liabilities and assets. Everything belongs to the company. If a liability situation occurs the company can be sued, but they have to prove you did it willfully and negligently to go after you personally. This means that your personal belongings such as your house can no longer be taken away because you are no longer personally liable for the company's debts and liabilities. Incorporation has some tax advantages too.
The best thing to do is take a class at your local community college on this subject. Basic business course usually cover the advantages and disadvantages of each type of business. Also, you should discuss this with an attorney before proceeding. You don't necessarily need an attorney to incorporate. You can find all the forms and procedures on the internet or in books at your local book store or library, but an attorney can explain any questions you may have and ease the process.
Manufacturer Certificate of Origin. Most state require a Manufacturer's Certificate of Origin to register and title a boat. A majority of the states have passed laws requiring boats to have a Title, just as cars have a Title. To get a Title a consumer has to show a legitimate bill of sale and Manufacturer's Certification of Origin. In some states this is called a Manufacturer's Statement of Origin. This is not a Federal or Coast Guard requirement. However, the Coast Guard has proposed a regulation for this, but currently it is still just a proposal. The best thing you can do is contact your State Boating Law Administrator and ask for a copy of the form used in your state. This form should be acceptable in any state because they are all patterned on a model put together by the National Association of State Boating Law Administrators. This form may be available from the Department of Motor Vehicles or other state agencies that register boats. The manufacturer should give the consumer this form as well as a bill of sale with each boat. Without this form your customers will not be able to register their boat.
If you are building a boat over five net tons, and it is going to be documented by the Coast Guard, rather than registered with a state, then there is a Coast Guard Form. CG Form 1261 Builder Certification and First Transfer of Title. This is also called a Manufacturers Certificate of Origin or a Master Builders Certificate. It is not available on the web. Documentation services (do a web search) will get this form for you, or you can contact the Coast Guard National Vessel Documentation Center or call 1-800-799-8362 or download the form at http://www.uscg.mil/hq/cg5/nvdc/forms/cg1261.pdf.
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