Welcome to GlobalAir.com | 888-236-4309    Please Register or Login
Aviation Articles
Home Aircraft For Sale  | Aviation Directory  |  Airport Resource  |   Blog  | My Flight Department
Aviation Articles

The IRS May Disregard Your LLC, But You Shouldn’t.

by Greg Reigel 4. December 2018 10:30
Share on Facebook

As you may know from my previous articles, an aircraft owner may use a limited liability company (“LLC”) to register and hold title to the owner’s aircraft. An LLC is formed by filing articles of organization with Secretary of State (or equivalent) in the state in which the LLC is organized. The LLC has members who hold/own membership interests in the company that are represented by the members’ capital accounts. The LLC may be managed by managers or it may be managed by the LLC member(s).

An LLC is a type of business entity that has distinct legal personality from its owner(s)/member(s) 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).

However, once set up, the laws governing LLCs require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records, filing annual renewals/registrations etc.). If the LLC does not comply with those formalities, it is possible that the law will not recognize the LLC as a separate “person” and will look to the LLC’s members or managers to personally honor the LLC’s obligations. This is called “piercing the corporate veil.” Not only is this a bad situation for the LLC members, this concept is frequently confused with the Internal Revenue Service’s treatment of an LLC as a “disregarded entity.”

Although an LLC is a “legal entity”, the Internal Revenue Service (“IRS”) does not treat an LLC as a “tax entity.” Rather, the IRS “disregards” LLCs for federal tax purposes as if the entity does not exist. Most LLCs with a single member are taxed as a sole proprietorship, while a multi-member LLC is usually taxed as a partnership. In some cases, the LLC can elect to be treated as an “S” corporation if the LLC satisfies certain criteria.

As a disregarded entity, a single-member LLC does not file an income tax return or report income, loss, deduction, or credit. Instead, the LLC member incorporates these tax items into the member’s tax return. Similarly, a multi-member LLC’s members and the members of an LLC that has elected “S” corporation tax status would report on their respective tax returns.

If you are using an LLC to own an aircraft, keep in mind that the IRS’s disregard of your LLC for tax purposes does not relieve you of your responsibility to comply with the formalities required by the laws applicable to LLCs. Failure to comply with the formalities can negate the personal liability protection otherwise afforded to an LLC’s members, and can also render the aircraft’s registration invalid. So, it is important to pay attention to both the tax and the legal aspects applicable to your LLC to take advantage of the benefits of owning an aircraft with an LLC.

Tags: , , , ,

Greg Reigel

What Happens To An Aircraft’s Registration If The Corporation Or LLC Owner Is No Longer Qualified To Do Business?

by Greg Reigel 29. December 2017 14:47
Share on Facebook

Many aircraft owners use a corporation or limited liability company to register and hold title to their aircraft. Oftentimes, the owners set up their legal entity and then forget about it. Unfortunately, many states require legal entities to file an annual renewal/registration or pay fees to stay “active.” If an entity does not perform the required filing, the entity could become “inactive”, “suspended”, “not in good standing”, or it could be “administratively dissolved.”

Fortunately, in most of those states the entity can be reactivated/reinstated, have the suspension removed, or be placed back in good standing by accomplishing the required filing (and usually paying an associated fee). But what happens to an aircraft’s registration if this happens to a business entity that holds title to that aircraft? Can the aircraft still be legally operated while the entity is “inactive” or “suspended”?

According to a recent Legal Interpretation issued by the FAA’s Office of the Chief Counsel, the short answer is “no.” But to understand why the answer is “no”, it is helpful to look at the regulations that govern registration of an aircraft by a business entity.

14 C.F.R. §47.3(a)(3) permits a corporation (or a limited liability company, which is also treated as a legal entity similar to a corporation) that otherwise meets the U.S. citizenship requirements, to register an aircraft with the FAA. 14 C.F.R. §47.43(a)(3) tells us that an aircraft’s registration is invalid if, at the time of that registration, the business entity applicant was not qualified to submit an application under 14 C.F.R. Part 47.

This means a business entity that did not have legal status at the time it submitted its registration application to the FAA would not have been qualified to submit the application. And by extension, according to the FAA, “a business entity that does not have or has lost legal status in the State in which it has been incorporated is neither eligible to register an aircraft nor operate that aircraft.”

However, whether a business entity has “lost legal status” will depend upon the facts of the situation and also the applicable state law. As a result, the applicable state law must be analyzed to determine the business entity’s true legal status if it is in this situation.

So, how does the FAA find out about an invalid registration? Well, since the FAA does not make determinations about the legal status of a business entity at the time of registration, or even while the aircraft is registered, this issue usually comes to light during an investigation or an enforcement action.

And if the FAA learns the business entity has lost its legal status and that the aircraft’s registration is therefore invalid, it could pursue enforcement action against anyone who operated the aircraft when the registration was invalid in violation of Section 47.3(b). It could also pursue the business entity owner for failing to return an invalid or ineffective registration certificate as required by Section 47.43(b).

The Moral of the Story: If you are going to use a corporation or limited liability company to own an aircraft, don't create the entity and forget it. Make sure you keep up with the required formalities and filings, including payment of fees etc., to ensure your business entity remains active and in good standing.

Tags: , , ,

Greg Reigel

Are You Using A Limited Liability Company To Own An Aircraft And Fly The Company’s Members/Guests? Be Careful.

by Greg Reigel 27. October 2017 08:16
Share on Facebook

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.

Tags: , , ,

Greg Reigel

Limiting Personal Liability With A Corporation Or Limited Liability Company

by Greg Reigel 1. July 2013 16:30
Share on Facebook
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?

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 a co-ownership/partnership situation in which the individual's mere ownership interest in the aircraft does result in the individual owner being legally responsible for the debts and obligations related to the aircraft.

Similarly, a director/officer of a corporation or governor /manager of an LLC is not personally responsible for the debts or obligations of the entity as long as the individual was acting within the scope of his or her duties on behalf of the corporation or LLC, as the case may be. 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.

Additionally, if that same individual improperly performed maintenance on the aircraft (e.g. changing the oil but forgetting to safety wire the oil drain plug) which later resulted in personal injury or property damage, even though the individual wasn't flying the aircraft at the time, that individual could still be personally liable. 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.

So, owning an aircraft with a corporation or LLC can provide some personal liability protection for the individual owners of the entity. However, that entity won't be able to shield an individual owner from liability based upon that individual's conduct. If you are going to own an aircraft and someone else will also fly or maintain the aircraft, a corporation or LLC is probably a good idea. On the other hand, if you are going to be the sole owner and operator of the aircraft, the corporation or LLC likely won't be much help, at least from a personal liability perspective.

If you are unsure whether a corporation or LLC is right for you and your aircraft, you should talk to an aviation attorney, to get the answers you need to make an informed decision.

Tags: , ,

Greg Reigel

Choice of Entity for Aircraft Ownership

by Greg Reigel 1. December 2006 00:00
Share on Facebook

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.

Regulatory Concerns

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.

Conclusion

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.

Question:

What way have you used?  Pros... Cons.  Let us know!



Archive



GlobalAir.com on Twitter