Are You Using A Limited Liability Company To Own An Aircraft And Fly The Company’s Members/Guests? Be Careful.
By Gregory J. Reigel
© October, 2017 All rights reserved.
Aircraft owners regularly use limited liability companies (an “LLC
”) to hold legal title to an aircraft. An LLC can help limit an owner’s personal liability, and it may also assist an owner with his or her tax planning. But using an LLC to hold title to an aircraft may also create problems for the aircraft owner if he or she does not structure the ownership appropriately.
In order to understand the potential risks of using an LLC to own an aircraft, a brief explanation of how an LLC is viewed and organized under the law is in order. First, an LLC is a type of business entity that has distinct legal personality from its owners/members and managers. An LLC is treated as a separate “person” in the eyes of the law with an independent existence from its members. Thus, if the owner/member of an LLC dies, the entity continues to exist (although an LLC needs to specifically elect to have this continuity of existence).
Next, LLC members each hold a membership interest in the LLC that is represented by the members’ capital accounts. The LLC members have full ownership and control of, and sole possessory interest in, their membership interests of the LLC, and not the individual assets owned by the LLC. Similar to a corporation, the LLC has managers to handle the day-to-day business of the LLC who are oftentimes also the members of the LLC. Additionally, the laws governing LLC’s require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records etc.). LLCs should not be construed to be alter egos of their members, even when they are structured as closely held companies.
Thus, when an LLC owns an aircraft, the LLC’s members do not actually own an interest in the aircraft. Rather, the aircraft is an asset of the LLC and is managed by the managers of the LLC, on behalf and in the best interest of the LLC. So, while the LLC members may own the LLC, they do not have a direct interest in the aircraft that is owned by the LLC. This is an important distinction that is often misunderstood by LLC members.
You might be wondering then whether an LLC may be operated under 14 C.F.R. § 91.501(b)(4)
for the personal transportation of its members and their guests. Under Section 14 C.F.R. § 91.501(b)(4)
, the operator of an aircraft may conduct flights “for his personal transportation, or the transportation of his guests when no charge, assessment, or fee is made for the transportation.”
However, in the context of this regulation the FAA views the term “operator” as applying to the personal use of an individual or his or her guests, the term “operator” would not apply to an LLC that is a business entity existing for “business purposes” rather than “personal purposes.” Additionally, even if the LLC does not directly charge the members or guests for the flight(s), if the members make capital contributions to the LLC to pay the cost of ownership and operation of the aircraft, that would constitute “compensation” (in the FAA’s broad interpretation of that word) for the personal transportation of the member and its guests. As a result, Section 14 C.F.R. § 91.501(b)(4)
would not be available to the members of the LLC.
Rather, in these situations the FAA takes the position that the LLC is the actual operator of the aircraft. The FAA would consider the LLC to be a “flight-department company” that is conducting commercial operations requiring an air carrier certificate under 14 C.F.R. Part 119
. As such, any operation of the aircraft by the LLC on behalf of the members or their guests without an air carrier certificate could subject the pilot(s) actually flying the aircraft to an FAA enforcement action and subject the LLC that owns and operates the aircraft to a civil penalty action. The Internal Revenue Service could also view the LLC’s operation of the aircraft as a commercial operation requiring the collection and payment of Federal Excise Tax on any flights performed on behalf of the LLC’s members or guests.
Does this mean you can’t use an LLC to own your aircraft? No, not at all. However, each situation is unique and must be analyzed to confirm that the aircraft owner will actually receive the benefits expected and that the ownership arrangement will comply with the regulatory requirements anticipated by the aircraft buyer for operations under 14 C.F.R. Part 91
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 comply with the regulations, and to also satisfy the FAA’s operational control and other concerns. If you want to use an LLC to own and hold title to an aircraft, contact us and we will work with you to ensure that the transaction is structured appropriately to meet the regulatory requirements applicable to your particular situation.