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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
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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.

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Greg Reigel

What Is The Difference Between Owning And Operating An Aircraft Under Part 91 Versus Part 135?

by Greg Reigel 24. April 2017 09:21
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Owners of business aircraft frequently face the question of whether their aircraft should be operated under 14 C.F.R. Part 91 (“Part 91”) or Part 135 (“Part 135”). And it isn’t uncommon for owners to simplistically choose Part 91 because they have been led to believe that Part 135 is far too expensive and restrictive. Unfortunately, that answer isn’t necessarily the correct answer for all circumstances. The question is more complicated and requires a thorough analysis of the facts.

Generally speaking, it is true that aircraft may be operated under Part 91 with fewer restrictions and regulatory requirements than when operating under Part 135. However, from a risk management perspective, Part 135 exposes the charter customer to the least amount of regulatory and legal liability risk. As a result, it is necessary to understand the key distinctions between operations under Parts 91 and 135 in order to determine how they apply to a particular situation.

Let’s look at some of the differences between Part 91 and 135:

RISK MANAGEMENT

The operator of an aircraft has primary legal liability for injury to persons or property arising from an aircraft accident or incident regardless of whether the operation is conducted under Part 91 or Part 135. The operator is the party who exercises authority over initiating, conducting or terminating a flight (“Operational Control”). The operator of the flight has legal liability whether the operator is the actual owner of the aircraft or merely a lessee.

Part 91

An entity that owns an aircraft may operate that aircraft under Part 91 as long as (1) that operation is incidental to its business, and (2) the operator is paying for those operations out of its normal revenue without receiving compensation or reimbursement from some other person or entity. That is, the entity must derive at least 51% of its revenue from business that is unrelated to its use of the aircraft, and then use and pay for that use incidental to that primary business activity. In such a situation the entity is exercising Operational Control of the aircraft and as the operator it has liability for its operation of the aircraft.

Expanding on this concept, an entity whose sole purpose is to own the aircraft (an “SPE”) may not operate the aircraft without certification from the FAA to act as an air carrier, i.e., it must have a “Part 135 certificate.” However, it is common under the FAA’s rules for an SPE to own the aircraft solely for the purpose of leasing it to other parties. For example, an aircraft may be owned by an SPE and then leased to an individual or business lessee who will then operate the aircraft under Part 91 pursuant to a “dry-lease,” with, as noted above, such lessee’s use being incidental to the lessee’s primary non-aviation-related business. A dry-lease is a lease for the aircraft alone, without crew, and may be with or without fuel, with the lessee then being responsible for providing its own flight crew either directly (e.g. lessee’s employee(s)), or hired as independent contractors from an outside source (e.g. a pilot services or aircraft management company). In this situation, the lessee is exercising Operational Control, and as the operator of the aircraft it has assumed all regulatory and civil liability for each of its operations of the aircraft under the lease (regardless of how it obtained its pilots, who performs the maintenance, and so forth).

Part 135

Conversely, where the Part 135 certificate holder exercises Operational Control over the aircraft and all flights, that Part 135 certificate holder has assumed regulatory and civil legal liability for injury to persons or property arising from an aircraft accident or incident. Passengers on the aircraft do not have legal liability.

An aircraft owner, whether SPE or otherwise, may lease an aircraft to a Part 135 certificate holder under a dry-lease. The Part 135 operator then provides the crew (either using the Part 135 operator’s employees or independent contractors who are then agents of the Part 135 operator) and conducts operations pursuant to its Part 135 certificate. In most cases the entity that owns the aircraft will not have any legal liability for the Part 135 certificate holder’s operation of the aircraft.

OPERATIONAL CONSIDERATIONS

In addition to risk management, various differences between operational conditions and limitations under Parts 91 and Part 135 must also be considered. These include:

 

  1. Airport Limitations:

    • Runway Length Requirements.

      Part 91 - Runway length requirements are determined solely by aircraft requirements and limitations.

      Part 135 - The aircraft must be capable of landing within 80% of the runway length. This affects/limits access to a significant number of smaller airports that may be more conveniently located to the ultimate destination.

    • Weather Reporting.

      Part 91 - An aircraft may begin an instrument approach to airports where there is no weather reporting and the pilots determine when they approach the airport whether they can land safely. Additionally, an aircraft may depart from an airport below IFR weather minimums.

      Part 135 - An aircraft may not begin an approach to an airport that has no weather reporting facility unless the alternate airport has approved weather reporting. This may not only adversely impact whether or when a flight may depart, but it again has the potential to limit access to airports that are more conveniently located to the ultimate destination. Takeoff and alternate airport minimums also restrict whether and when a flight may be conducted.

  2. Flightcrew Member Restrictions:

    • Pilot Agency.

      Under both Parts 91 and 135 Flightcrew members must be agents of the party exercising operational control. This agency may be established by employment or contract. Flightcrew members who are employees of an entity other than the Part 135 certificate holder may be paid by their employer and still be agents of the Part 135 certificate holder provided the flightcrew members have entered into an appropriate agency agreement with the Part 135 certificate holder.

    • Flightcrew member Duty Time Limitations and Rest Requirements.

      Part 91 - Flightcrew member duty time and rest requirements are not imposed. This means the flightcrew members may operate the aircraft on multiple flights as long as they feel they are adequately rested and safe to fly.

      Part 135 - Flightcrew members are requirement to comply with specific duty time and rest requirements. The rules are complicated, but generally provide for a maximum assigned 14 hour duty day, limitations on the number of flight hours during a 24-hour period and required rest periods. Once a flightcrew member has reached his or her limit, that flightcrew member may not fly until the applicable rest requirements have been satisfied.

    • Drug and Alcohol Testing.

      Part 91 - Drug and alcohol testing of flightcrew members is not required.

      Part 135 - Certificate holders must comply with the same drug and alcohol testing requirements as air carriers operating under Part 121. Flightcrew members are subject to pre-employment/transfer, random, reasonable suspicion/cause, post-accident, return to duty, and follow up drug and alcohol testing pursuant to the Part 135 operator’s drug and alcohol testing program.

  3. Restrictions and Fees in Foreign Countries:

    Part 91 - Operations may be subject to some additional fees, but are typically not required to obtain additional licensing to operate in foreign countries.

    Part 135 – Certificate holders operating within foreign countries are subject to bilateral air transport agreements between the U.S. and those countries. These agreements subject the Part 135 operator to fees, regulations and additional licensing imposed by foreign countries for its commercial operations. The fees are typically passed on to the customer, increasing the cost of the charter flight.

  4. Maintenance and Equipment:

    Any U.S. registered aircraft must be maintained under some form of approved maintenance program. Under Part 91 this is typically done under the manufacturer’s basic recommended maintenance program, and so long as the operator meets those requirements, no further compliance or oversite by the FAA is required. Under Part 135, the aircraft must be maintained in accordance with a program that has been specifically approved by the FAA for that particular operator, and while these plans are commonly based on a manufacturer’s programs, they also typically include additional requirements imposed on top of the manufacturer’s requirements. Thus, depending upon the age and condition of the aircraft and whether it is currently enrolled in any maintenance or warranty programs, the cost of maintenance for an aircraft operated under Part 135 is potentially higher than if the aircraft were operated solely under Part 91. Because a Part 135 certificate holder cannot operate an aircraft unless it can document that the aircraft has been continuously maintained under its FAA-approved program, the practical effect of this is that if the aircraft is held in an SPE and then leased to both a Part 91 operator for its occasional use and to a Part 135 certificate holder for its use, then the aircraft will need to be maintained at all times under the approved Part 135 program, so the cost differential between Part 91 and Part 135 maintenance programs will largely become irrelevant.

  5. TSA Security Requirements:

    Part 91 – Operations are not subject to TSA security program requirements. Part 91 operators are not permitted to operate within sterile areas at airports.

    Part 135 - Certificate holders operating aircraft with a gross take-off weight in excess of 12,500 pounds are required to have a TSA approved security program in place. The Part 135 operator’s flightcrew members are subject to criminal history records checks and certain training requirements. The security program requires timely transmittal of crew and passenger lists in advance of flights. This means that last-minute changes of passengers on a particular flight is usually not possible. Also, if the flight will be enplaning or deplaning within the sterile area of an airport then additional screening requirements must be met.

CONCLUSION

As you can see, operations under Parts 91 or 135 have both advantages and disadvantages. Owners and operators of business aircraft need to carefully consider each in the context of their own circumstances. An in-depth discussion with a knowledgeable aviation attorney is also recommended to make sure their decision is the right one for their situation.

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Greg Reigel

Keeping the FAA Happy When Registering an Aircraft Owned by an LLC

by Greg Reigel 6. July 2015 11:46
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A Limited Liability Company ("LLC") provides personal liability protection to its owners, as well as the tax and management flexibility. Both of these advantages have resulted in the increased use of LLC's for aircraft ownership. However, in order for the FAA to accept an application for aircraft registration submitted by an LLC, the aircraft owner needs to comply with the registration requirements of 14 C.F.R. Part 47.

One of those requirements is that the LLC must meet the U.S. citizenship requirements of 14 C.F.R. § 47.3. One of the ways to prove to the FAA that the LLC does, in fact, satisfy those requirements is to submit a "Statement in Support of Registration by a Limited Liability Company" ("LLC statement"). Although this isn't the only way to prove citizenship to the FAA, it is one of the most common methods.

In the LLC statement, the LLC must identify its members and confirm whether each of its members is a U.S. citizen. However, if one of the members is another LLC, the FAA will require an additional LLC statement for that member LLC identifying its members and confirming that those members are also U.S. citizens. The idea is that the FAA wants to drill down to identify which of the individuals involved are U.S. citizens and then determine whether the LLC qualifies as a U.S. citizen under 14. C.F.R. § 47.2. If that second (or third, if necessary) LLC statement isn't filed, the FAA will not register the aircraft until it either receives the LLC statement(s) or it receives other proof (usually organizational documents for the LLC) showing the citizenship of the members.

When all of the LLC's individual or entity members are U.S. citizens, then the LLC will be considered a U.S. citizen. If all of the individuals or entity members are not U.S. citizens, in order for the LLC to be satisfy the citizenship requirement, 2/3 of its officers/managers satisfy U.S. citizenship AND whether 75% of the voting interest of the LLC is controlled by individuals or entities meeting U.S. citizenship requirements.

Another item on the LLC statement indicates whether the LLC is managed by its members or managers. Whatever answer is provided, that information needs to match the information provided by the LLC on the application for registration. For example, if the LLC statement indicates that the LLC is managed by its members, then the individual who signs the application for registration should indicate his or her title as "member" or "managing member." On the other hand, if the LLC statement indicates that the LLC is managed by managers, then the individual signing the application should indicate his or her title as "manager" or some variant that includes the word manager (e.g. chief manager, chief financial manager etc.). If the LLC statement and the application for registration do not match, the FAA will reject the application.

Additionally, although an LLC may also be managed by officers, if the individual signs the application for registration as an officer (e.g. president, vice-president, treasurer etc.) the LLC statement will not be sufficient for the FAA to determine whether that individual has the appropriate authority. In that case, the FAA will reject the application unless it also receives the LLC's operating agreement or some other documentation evidencing the officer's authority to sign on behalf of the LLC.

Applying for registration of an aircraft with the FAA on behalf of an LLC can be tricky. The aircraft owner(s) using an LLC to own an aircraft need to carefully dot the "i's" and cross the "t's" to ensure that the FAA will accept the LLC's application and register the aircraft. Understanding the LLC statement and the FAA's requirements can help you avoid some of the "gotcha's" that can cause problems for an aircraft owner trying to register an aircraft with the FAA using an LLC.

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Greg Reigel

8 Important Questions to Ask Before Buying Your First Airplane

by Sarina Houston 15. May 2015 13:02
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Buying an airplane isn't quite as simple as buying a car. From operating costs, maintenance requirements, storage and insurance, there are many elements to consider when purchasing an aircraft. If you're a first-time buyer or are considering an aircraft purchase, take the time to investigate the process, learn about the market and ask a lot of questions. To get you started, here are a few things you'll want to consider:

  1. What's your budget?
    This seems obvious, but first-time buyers should take a detailed look at their budget. There are many costs associated with owning an airplane beyond the price tag. You'll need to consider the loan payment, insurance, maintenance, operating costs, hangar or tie down fees, and other surprise costs that might occur out of your control like mandated avionics upgrades.

  2. What can you fly safely?
    Everyone wants a larger and faster airplane, but don't be tempted to buy an airplane that's out of your league. Buy an airplane that you're comfortable flying safely and within your personal skill limitations. Even a slightly more powerful engine, or just a slightly larger airplane can have much different handling characteristics, and advanced avionics can leave you behind in a hurry if you're not familiar. Buying an airplane you don't have a lot of experience in can lead to regret.

  3. What's the purpose of the airplane?
    First-time aircraft buyers need to evaluate their reasons for buying an airplane. What kind of aircraft will provide the function you need? If you really analyze your purpose, you may find that the aircraft you initially have your eye on isn't actually in line with what you need. If you intend on flying an occasional joyride on the weekends in the local area, for example, you probably don't need an overpowered multi-engine machine with top-of-the-line avionics. If you travel long distances for business, an IFR certified, speedy, retractable gear aircraft might be more in line with your needs. Try to avoid buying an airplane based on emotion. Just because it looks cool or has large, powerful engines does not make it a good fit for you.

  4. How much is insurance? What are the requirements to be insured?
    Insurance is complicated. Buying aircraft insurance is not quite as easy as buying auto insurance. Nor is it as cheap. Make sure you know what the insurance costs will be before you start looking for airplanes to purchase. It's no fun to buy your dream airplane just to find out that insurance will be double what you thought it might be - after the insurance company requires you to attend an expensive training class and obtain a certain number of instructional hours in the airplane. These are standard procedures, but can be costly if you're not prepared prior to choosing an aircraft.

  5. Where will you keep it?
    Will you buy or build your own hangar? Will you rent one from the airport? Is there hangar space available at your airport, or will you be tossed out on the ramp? Do you have a back-up plan in place in case your hangar owner decides not to renew your lease? You'll want to ensure you have a place to store your aircraft, and you'll need to budget for those storage costs.

  6. Who will maintain it?
    Choosing a maintenance facility is probably the most important decision you'll make as a new aircraft owner. But don't wait until after your purchase the aircraft to choose a maintenance facility. Finding a trusted mechanic to help you with your purchase will save you time and money in the long run. A trustworthy mechanic can help you with a pre-buy inspection and can offer advice about certain aircraft types and model numbers before you make the purchase. And after the purchase, your mechanic will need to be someone you can completely trust and rely on to provide quality maintenance in accordance with the FAA and manufacturer's standards.

  7. What technology will you need?
    Taking a detailed look at aircraft technology is necessary when you're purchasing an airplane. Make sure you know what technology is necessary for your flying purposes, know what you're willing to sacrifice, and know how much you're willing to pay for the added conveniences of certain technologies. You might be able to get away with purchasing an older aircraft with outdated avionics if your flying is accomplished in good weather and in uncontrolled airspace. But if you often fly in Class B airspace, or mostly on IFR flight plans, you'll want to invest in modern avionics. And what about other technology, like aircraft anti-ice systems, digital engine monitoring, or weather radar? Do you need these things or, if not, do you intend to fork over the money for the added convenience and safety factor?

  8. What's the resale value?
    They say nothing lasts forever, and there will likely come a time when you'll want to or need to sell your aircraft. Do some basic market research about your aircraft to make sure that you'll be able to sell it easily when you want to. Is there a known mechanical problem with this particular make and model? Will the age of the avionics prevent people from wanting to purchase it in five or ten years? Is the safety record good, or is it a type of aircraft that has particular hazards associated with it? Is the logbook history complete and accurate? Has it been well maintained?

There's a lot to think about before buying an airplane. Talking to a number of skilled aviation professionals about the topics listed above will assure that you're armed with as much knowledge as possible before making decisions before, during and after the aircraft buying process. Still in over your head? Consider an aircraft broker.

Have you successfully purchased an airplane before? Share your advice with us!

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Aircraft Sales | Flying | Sarina Houston

What's an Airplane Cost? Common Aircraft Price Tags

by Sarina Houston 16. March 2015 11:10
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Curious how much airplane you can get for your money? If you’re just starting your search for an airplane, you might be surprised to learn that aircraft prices vary widely, depending on the year, modifications done to the airplane and the relevancy of the avionics, among other things.. A Cessna 172, for example, might cost $40,000 or $400,000 dollars.

From light aircraft to business jets, the costs vary from large to small. Here are some examples of what you’ll pay for a few of the most commonly purchased airplanes:

The Cessna 172


1982 Cessna 172P: $39,000

1981 Cessna 172P: $72,000

2007 Cessna 172SP: Approximately $150,000-$250,000

2015 Cessna 172SP: Approximately $364,000

 

The Mooney M20

 

1977 Mooney M20J: $65,000

2009 Mooney M20TN Acclaim: $425,000

 

The Beechcraft Baron 58
1977 Baron 58P: $175,000

2005 Baron 58: $649,000

 

The Piper Meridian
2007 PA46-500TP: $1.2 million

2015 PA46-500TP: $2.3 million

 

The King Air
1981 King Air B200: $825,000

2004 King Air B200: $2.3 million

 

The Citation Sovereign
2007 Cessna Citation Sovereign 680: $6.9 million

2008 Citation Sovereign 680: $8.0 million

 

The Gulfstream G550
2006 Gulfstream G550: $25.0 million

2014 Gulfstream G550: $49.9 million



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