Why Using an LLC to Own and Operate Your Aircraft Is a Bad Idea
This is a post by guest author Dave Weil, CEO and Founder of Flight Dept Solutions, LLC. Dave was asked to contribute to this blog because of his expertise in aircraft management and flight department issues. Any thoughts expressed below are entirely Dave’s and do not necessarily reflect the views of Universal Weather and Aviation, Inc.
Business aviation reminds me of religion: It has many traditions that are very slow to change, even when good reasons for change to exist. One such tradition is using a “sole purpose” limited liability company (LLC) to own and operate a business jet. Despite widespread warnings by the National Business Aviation Association (NBAA) and most aviation attorneys, many owners and their advisers still follow this tradition.
Historically many lawyers thought it was a great idea to form a sole-purpose LLC to operate a business jet. (i.e. The “sole purpose” of the LLC is to operate the aircraft. This is the entity’s only activity.) The LLC is a business entity specifically designed to limit liability. What better asset to limit one’s liability from a business aircraft? The only problem is this configuration is a very bad idea.
The following are four very good reasons why:
1. FAA regulatory non-compliance
If an LLC is created for the sole purpose of operating an aircraft, including employing the pilots (or engaging the pilots via a management company), then, according to the FAA, the LLC is engaged in providing commercial transportation, and the aircraft should be flown under the FAA’s part 135 charter regulations. This is true even if the aircraft is only providing flights for the owner of the LLC. Unfortunately, many aircraft owners do not understand this requirement and operate their aircraft illegally, as if it qualified for part 91 use. This type of illegal operation can subject the pilots to FAA enforcement action and expose the LLC to significant fines from the FAA.
2. IRS Federal Excise Tax (FET) liability
The money paid into a sole purpose LLC by its owner to fund aircraft operations may be considered compensation paid for transportation by the IRS. As such, these payments may be subject to the 7.5% FET. Again, many owners do not realize this potential tax liability exists and may be in for a rude surprise should they get audited.
3. Voiding insurance coverage
Every aircraft insurance policy includes a purpose-of-use clause. If an aircraft is to be used for commercial transportation (i.e. part 135), then this particular purpose needs to be explicitly stated in the policy. However, in most cases where a sole-purpose LLC is created to operate an aircraft, there is no realization that the airplane is engaged in illegal part 135 operations. Typically, the purpose-of-use wording in these situations only allows part 91 use. In such instances, if an accident occurs and the aircraft was not properly certified for part 135 activity, the insurance company could deny the claim.
4. Piercing the LLC liability shield
The primary purpose of using an LLC entity is to protect the owner from liabilities created within it (e.g., liabilities resulting from an accident). If the LLC is engaged in illegal activities, such as non-compliance with the FAA’s part 135 regulations, then it may be possible to “pierce the corporate shield” and negate the liability protection that the LLC was intended to provide.
If your aircraft operation is set up using the traditional sole-purpose LLC structure, it is strongly advised that you consult with an experienced business aviation attorney. There are ways to remedy the situation. You should determine what remedy is best for your particular situation before you run into a serious problem caused by one of the four reasons noted above.
If you have any questions about this article, contact me at firstname.lastname@example.org.