Choice Of Entity For Aircraft Ownership
By Gregory J. Reigel
© December, 2006 All rights reserved.
You have probably read the ads in several of the aviation magazines suggesting that aircraft buyers should “incorporate in Delaware” etc. Also, quite often an aircraft buyer’s accountant or attorney will recommend that he or she form a corporation or limited liability company (“LLC”) to own the aircraft. But does this make sense? In most cases it does. Let’s talk generally about two of the most common types of entities, a few of the benefits of using those entities to purchase an aircraft and the regulatory concerns that may be encountered.
Types Of Legal Entities
A variety of legal entities are available for ownership of an aircraft: partnership, limited liability partnership, corporation, LLC etc. Two of the most common are the corporation and the LLC. A corporation is owned by all of its shareholders, who own the stock of the corporation. A shareholder’s stock certificate(s) is evidence of the shareholder’s ownership in the corporation. The corporation has a Board of Directors that elects officers to handle the day-to-day business of the corporation.
An LLC is organized similarly. However, members, rather than shareholders, own an LLC. LLC members do not own stock in the LLC, but simply hold a membership interest in the company that is represented by the members’ capital accounts. Similar to the corporation, the LLC’s members elect a Board of Governors that elects managers to handle the day-to-day business of the LLC.
A corporation and an LLC are each treated as a separate “person” in the eyes of the law with an independent existence from their respective owners. Thus, if the owner of a corporation or LLC dies, the entity continues to exist (although an LLC needs to specifically elect to have this continuity of existence). Additionally, the laws governing both types of entities require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records etc.).
Reasons For Using An Entity
Limited Personal Liability. 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. This is in contrast to a sole proprietorship or partnership in which the individual’s mere ownership interest does result in the owner being legally responsible for the debts and obligations of the business.
Similarly, a director/governor or officer/manager is not personally responsible for the debts or obligations of the corporation or LLC as long as the individual was acting within the scope of his or her duties on behalf of the corporation or LLC. For example, if an individual leases a hangar on behalf of a corporation or LLC and then the corporation or LLC defaults under the lease, the landlord cannot hold the individual who signed the lease responsible for the default, unless the individual was not authorized to enter into the lease on behalf of the corporation or LLC or the individual otherwise personally guaranteed or obligated him or herself under the lease.
However, in the context of 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. Also, if an individual acts outside of the scope of his or her authority to act on behalf of the corporation or LLC, he or she may be held responsible for any consequences of those actions.
Confidentiality. Typically, a corporation or LLC can be formed and filed with the governing state without disclosing the names of any of the parties involved other than the incorporator or organizer for the entity. However, this confidentiality does not apply equally to the registration of an aircraft with the FAA. A corporation may register an aircraft in its corporate name with a corporate officer executing the application for registration. However, although an LLC may also register the aircraft in the name of the LLC, an LLC statement disclosing the names, addresses and citizenship of the individual members will need to be executed and filed with the FAA to confirm that U.S. citizenship requirements are met.
Tax Reasons. A corporation’s or LLC’s ownership of an aircraft may provide tax benefits that may not otherwise be available to an individual or partnership (depreciation, deductions etc.). However, each situation is different and must be analyzed by a tax professional to determine the availability of such tax benefits.
Although an aircraft buyer may be able to benefit by using a corporation or an LLC for his or her ownership of an aircraft, the aircraft buyer also needs to be aware of the regulatory issues that may result from this ownership structure. One of the primary regulatory concerns may arise 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. Intending to limit personal liability, the buyer forms a separate corporation or LLC to own the aircraft. The corporation or LLC then operates the aircraft for the buyer under FAR Part 91.
Unfortunately, if this arrangement isn’t structured properly, the FAA could 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. Accordingly, any operation of the aircraft by the corporation or LLC on behalf of the buyer without an air carrier certificate 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.
Similarly, depending upon how this arrangement is structured, the Internal Revenue Service could view the corporation’s or 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 buyer. Alternatively, a private operation may only require the collection of sales tax.
Using a corporation or LLC to own an aircraft can provide benefits to the aircraft buyer. However, each situation is unique and must be analyzed to confirm that the aircraft buyer 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 FAR Part 91. As they say, “the devil is in the details.” Aircraft buyers desiring to use a corporation or LLC for purchase of an aircraft should work with a knowledgeable aviation attorney to ensure that the transaction is structured appropriately to meet the regulatory requirements applicable to their particular situation.