by Gregory J. Reigel
© Copyright October 2022. All rights reserved.
Published in Midwest Flyer Magazine October/November 2022 Digital Issue
I’m often asked by aircraft purchasers whether they should use a limited liability company (“LLC”) to hold title to the aircraft. Many have read the ads in several of the aviation magazines suggesting aircraft purchasers should use a Delaware LLC to own their aircraft, etc. Sometimes their accountant or regular business attorney will recommend that an LLC be used. But does this make sense? The lawyerly answer is “it depends.”
What Is An LLC?
An LLC is organized similarly to a corporation. 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.
An LLC is treated as a separate “person” in the eyes of the law with an independent existence from its respective owners. Thus, if the owner of an LLC dies, the entity continues to exist (although an LLC needs to specifically elect to have this continuity of existence). Additionally, the laws governing LLCs require that certain formalities be observed (e.g., annual meetings, separate checking accounts, maintaining corporate/company books and records, etc.).
Why Would You Want To Use An LLC?
Limited Personal Liability. One of the primary benefits of an LLC is the limited personal liability protection the entity affords. An owner of an LLC, simply by virtue of that ownership interest, is not personally responsible for the debts and obligations of the LLC, other than to the extent of his or her ownership interest in the 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, an officer or manager of an LLC is not personally responsible for the debts or obligations of the LLC as long as the individual was acting within the scope of his or her duties on behalf of the LLC. For example, if an individual leases a hangar on behalf of an LLC and then the 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 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 member/governor/manager of the LLC is operating an aircraft owned by the 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 LLC. Also, if an individual acts outside of the scope of his or her authority to act on behalf of the LLC, he or she may be held responsible for any consequences of those actions.
But, if the LLC is owned by multiple members/owners, when one member is flying the aircraft, the LLC will usually provide liability protection to the other members. And if a third-party who is not a member of the LLC is flying the aircraft, the LLC should provide liability protection to all of the LLC’s members.
Confidentiality. In many states, an LLC can be formed and filed with the governing state without disclosing the names of any of the parties involved, other than the organizer for the entity. However, this confidentiality does not apply equally to the registration of an aircraft with the FAA. Although an LLC may also register the aircraft in the name of the LLC, an LLC statement disclosing the name 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. An LLC’s ownership of an aircraft may provide tax benefits that may not otherwise be available to an individual or partnership (depreciation, deductions, etc.). But in some states owning an aircraft with an LLC could also subject the aircraft to personal property tax. Each situation is different and must be analyzed by a tax professional to determine the availability of such tax benefits.
Regulatory Concerns
Although an aircraft buyer may be able to benefit by using 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 LLC to own the aircraft. The 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 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 LLC on behalf of the buyer or others 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.
Similarly, depending upon how this arrangement is structured, the Internal Revenue Service could 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 buyer.
Conclusion
Using an 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 an 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.
EDITOR’S NOTE: Greg Reigel is an attorney with Shackelford, Melton, McKinley & Norton, LLP, and represents clients throughout the country in aviation and business law matters. He has more than two decades of experience working with airlines, charter companies, fixed base operators, airports, repair stations, pilots, mechanics, and other aviation businesses in aircraft purchase and sales transactions, regulatory compliance including hazmat and drug and alcohol testing, contract negotiations, airport grant assurances, airport leasing, aircraft-related agreements, wet leasing, dry leasing, and FAA certificate and civil penalty actions. For assistance, call 214-780-1482,
email: greigel@shackelford.law, or Twitter @ReigelLaw (www.shackelford.law).
