Are you Running An Illegal Flight Department Company?
By Gregory J. Reigel
© February, 2017 All rights reserved.
Do you own your aircraft through a corporation or limited liability company (“LLC”)? If you do, you may have done that after reading the ads in several of the aviation magazines suggesting that aircraft buyers should “incorporate in Delaware” etc. Or your accountant or attorney may have recommended that you form a corporation or limited liability company (“LLC”) to own the aircraft.
This isn’t unusual since one of the primary benefits of a corporation or LLC is the limited personal liability protection the entity affords. An owner of a corporation or LLC, simply by virtue of that ownership interest, is not personally responsible for the debts and obligations of the entity, other than to the extent of his or her ownership interest in the corporation or LLC. But, in the context of civil liability arising from aircraft ownership, this limited liability protection is not absolute.
If an individual, who may be a shareholder/director/officer of the corporation or member/governor/manager of the LLC, is operating an aircraft owned by the corporation or LLC and that individual is involved in an accident or incident that results in damage to property or personal injury, that individual could still be held personally responsible for his or her negligence etc., in addition to the corporation or LLC. Similarly, if the aircraft is operated in connection with a different business, that business could also have liability exposure.
Additionally, while an aircraft buyer may benefit by using a corporation or an LLC to own an aircraft, the aircraft buyer also needs to be aware of the regulatory issues that may result when an aircraft is purchased by, and operated from, what is commonly referred to as a “flight-department company.” In this scenario, the buyer, which may be an individual or a business, purchases an aircraft and forms a separate corporation or LLC to hold title to the aircraft. That corporation or LLC then hires pilots and those pilots operate the aircraft for the buyer and oftentimes the buyer’s individual owners, all the while thinking the operations are being conducted under FAR Part 91.
Unfortunately, this arrangement isn’t structured properly for Part 91 operations. Rather, the FAA will view the corporation’s or LLC’s operation of the aircraft on behalf of the buyer as a commercial operation requiring an air carrier certificate. And if the corporation or LLC does not hold an air carrier certificate (which is usually the case) then the FAA will consider those flights to be illegal charter flights. Additionally, the IRS would also probably assess Federal Excise Tax on those flights.
It is also important to keep in mind that the FAA will look beyond any written agreements between the parties to determine how the arrangement is actually conducted. Although a lease between the corporation or LLC and the buyer is written as a dry lease and says “Dry Lease” at the top of the agreement, for example, that doesn’t mean that the FAA can’t take the position that the arrangement is really being conducted as a commercial operation if that is the way the parties are truly operating the aircraft.
And if the FAA takes that position, then that will be a problem for the corporation or LLC, and potentially for the aircraft buyer as well. Additionally, this type of operation could subject the pilot(s) actually flying the aircraft to an FAA enforcement action and subject the corporation or LLC that owns and operates the aircraft to a civil penalty action.
Does this mean you can’t have a corporation or LLC own your aircraft? No, not at all. But it does mean that you need to carefully structure the ownership and operation of your aircraft to make sure you are compliant with the regulations. With the appropriate use of a dry lease or use agreement, and pilot agency and service agreement, it is possible to structure the ownership and operation of your aircraft to satisfy the FAA’s operational control and other concerns.
So, at the end of the day, if you do it right, you certainly can have a corporation or LLC own your aircraft, operate it under Part 91, and not be an illegal flight department company.