Is A Corporation Or Limited Liability Company Right For You?

You have probably read the ads in several of the aviation magazines suggesting that aircraft buyers should “incorporate in Delaware,” etc. 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. Similarly, individuals starting a business, such as a maintenance shop, will receive these same recommendations. 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 or start a business, and the regulatory concerns that may be encountered.

Types Of Legal Entities

A variety of legal entities is 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 to elect 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 results 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 or performance of maintenance services, 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 in addition to the corporation or LLC.

The absence of personal liability protection also applies to an individual, who may be a shareholder/director/officer of the corporation or member/governor/manager of the LLC, who fails to perform maintenance properly and then returns an aircraft to service. In that situation, the individual could be held personally responsible for any damage caused by his or her negligence. Finally, 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 personally 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. This confidentiality does not necessarily 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.

Similarly, to the extent that the individuals involved in the formation of a maintenance shop also fulfill required positions on a Part 135 or Part 145 certificate, their names and positions will be disclosed to the FAA. This disclosure would occur whether the certificate holder was a corporation or an LLC.

Tax Reasons. A corporation’s or LLC’s ownership of an aircraft, or operation of a business such as a maintenance shop, 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.

Regulatory Concerns

In the context of an aircraft buyer using a corporation or an LLC for ownership of an aircraft, the aircraft buyer 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.

Fortunately, a maintenance shop isn’t faced with these types of regulatory concerns.  Although regulations do apply to the formation and operation of the business, they do not require the same level of scrutiny and planning that is required in the aircraft ownership context.

Conclusion

Using a corporation or LLC to own an aircraft or operate a business can certainly provide benefits. However, each situation is unique and must be analyzed to confirm that the entity chosen will actually deliver the benefits expected and will comply with the regulatory requirements that may apply. As they say, “the devil is in the details.” Anyone desiring to use a corporation or LLC for purchase of an aircraft or formation of a maintenance business 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.

© February, 2012 All rights reserved.

Greg Reigel is an aviation attorney, author and pilot. He holds a commercial pilot certificate (single-engine land and sea and multi-engine land) with instrument rating. His practice concentrates on aviation litigation, including aviation insurance matters and FAA certificate actions, and also aviation transactional matters. He is admitted to practice law in Minnesota and Wisconsin and advises clients throughout the country on aviation law matters. A cum laude graduate of William Mitchell College of Law, Reigel is the founder and president of the law firm Reigel & Associates, Ltd./Aero Legal Services based in Hopkins, Minn. He frequently speaks to groups on aviation and business law issues. Reigel is a member of the AOPA Legal Services Panel, secretary of the Minnesota Aviation Trade Association, and a member of the NTSB Bar Association, National Business Aviation Association, Minnesota Business Aviation Association, ABA-Forum on Air & Space Law, Lawyer-Pilot Bar Association and Experimental Aircraft Association.

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