Key Takeaways

  • An aircraft LLC operating agreement provides structure, safety protocols, and financial clarity for shared aircraft ownership.
  • Additional clauses should address FAA compliance, tax implications, depreciation, and asset protection strategies.
  • LLC members do not individually own the aircraft; ownership lies with the LLC, which must be reflected in documentation and liability protections.
  • Non-commercial use and leasing arrangements require specific legal language to remain FAA compliant.
  • Choosing the right state to form your LLC can significantly impact registration, taxes, and legal exposure.

Benefits of an Aircraft Organization

If you are a pilot or own a business that has use for a private aircraft, it may be worthwhile to consider owning a business aircraft. It may be able to bolster your business growth and shorten the time it takes to successfully close transactions and deals while retaining your top customers and executives. This strategy improves your company's efficiency, convenience, and flexibility.

However, the costs of owning an aircraft are high, especially if it's not always in use. For this reason, many businesses share these costs with one or more partners, instantly reducing the fixed costs of owning a plane by at least half. This means that every hour you spend in the air costs less than it would if you owned the plane.

When forming an LLC for your aircraft club, all your members must be U.S. citizens. You can submit a Statement in Support of Registration by an LLC to the Federal Aviation Association for this purpose.

Elements of an Aircraft LLC Operating Agreement

This type of operating agreement typically dictates how the group's members should care for and use the aircraft owned by the club. This creates a feeling of ownership and a positive experience for each of the members. Items that should be covered by the agreement's operating rules include but are not limited to:

  • The process of scheduling flight time
  • Procedures for maintaining the aircraft, including 100-hour inspections
  • Fueling procedures
  • Protocol for reporting maintenance issues including those that occur away from the base airport, who issues should be reported to, how they are communicated to other members, and what types of issues ground the aircraft
  • Daily minimums for an extended trip
  • Protocol for night flying
  • Proficiency requirements
  • Correct tie-down procedures, including cleaning and storage
  • The types of club memberships available, including flying and non-flying (social) memberships
  • The maximum number of members
  • The maximum number of concurrent reservations per member
  • The procedure to resolve scheduling conflicts
  • Procedures to follow if an incident occurs, such as who pays the insurance deductible
  • When hourly rates and monthly dues are collected

Additional Provisions to Include in an Aircraft LLC Operating Agreement

When drafting your aircraft LLC operating agreement, consider including advanced provisions that address the legal and regulatory complexities of aircraft ownership. These elements can protect the LLC and its members from potential liability and ensure ongoing FAA compliance:

  • Title and Registration: Clearly state that the aircraft is titled in the name of the LLC. Members should not appear as co-owners on FAA documents.
  • FAA Non-Commercial Use Compliance: To maintain eligibility for private use (FAR Part 91), prohibit compensation or use that would reclassify the operation as commercial.
  • Dry Leasing Provisions: If members lease the aircraft from the LLC, clarify that the lease is a "dry lease" (aircraft only, no crew provided) to avoid FAA charter restrictions.
  • Insurance and Indemnification: Outline required insurance coverages, who pays premiums, how deductibles are split, and procedures in case of an accident.
  • Tax and Depreciation Planning: Include language about how aircraft depreciation and tax benefits (such as bonus depreciation) will be handled and allocated.
  • Liability Protections: Emphasize limited liability and include language that discourages personal guarantees or misuse of the aircraft that could pierce the corporate veil.

These provisions help ensure operational clarity, protect members legally and financially, and create a strong foundation for managing shared aircraft use.

Developing the Operating Agreement

Having solid operating rules in place mitigates problems by having clear roles, responsibilities, and expectations in writing. When writing the agreement, include members in the process to ensure that the guidelines are comprehensive and that everyone feels ownership and camaraderie as part of the club.

In many cases, your members may be pilots who are in a recreational club setting for the first time. Communicating and reviewing the rules helps ensure a safe, professional experience. You may want to post your operating rules online. You can also look at examples of operating agreements posted by the Aircraft Owners and Pilots Association (AOPA).

It's important for a committee to periodically review and update the operating agreement. Guidelines will change based on operational improvements, successful problem-solving strategies, and experience gained with time.

Understanding Ownership: LLC Members vs. LLC Entity

It's essential to recognize that individual members of an LLC do not own the aircraft directly. The aircraft is owned by the LLC itself, which is a separate legal entity. This distinction must be preserved in documentation and behavior to uphold liability protections and FAA requirements.

Members should avoid describing themselves as "owners" of the aircraft to third parties. Instead, all references to ownership in registration, insurance, and communications should identify the LLC as the owner. Misrepresentation can lead to complications with the FAA and could jeopardize limited liability protections in the event of litigation or regulatory scrutiny​.

Benefits of an LLC

Unlike corporations, LLCs avoid double taxation by operating as pass-through entities. This means that profits and losses are reported on each LLC member's individual tax return. Talk with a tax professional to determine whether forming an LLC may be advantageous for your aircraft organization. In some cases, purchasing an aircraft as an LLC may allow you to deduct a portion of the operating expenses for the plane as well as avoid state use and sales tax.

LLCs also have fewer managerial and administrative requirements than corporations, which makes them easier and less costly to operate. This entity also has few restrictions about who can own a portion of the LLC and how many owners (called members) the business can have.

Members of an LLC enjoy limited liability, which means that their personal assets cannot be seized to satisfy a business debt or obligation. Keep in mind, however, that exceptions to this liability do exist, such as if a member personally guarantees a business loan, causes personal injury or property damages, or engages in fraud. You can obtain liability insurance to cover instances in which your limited liability may be at risk.

Choosing the Right State for Aircraft LLC Formation

Where you form your aircraft LLC can influence costs, taxes, and regulatory obligations. Consider the following factors when choosing a state:

  • Aircraft Registration Location: Some states offer tax advantages or exemptions for aircraft owned by LLCs formed in specific jurisdictions (e.g., Delaware or Wyoming).
  • State Sales and Use Tax: Research whether the state where the aircraft is hangared imposes use tax. Some owners form LLCs in states with favorable tax exemptions and use specialized leasing arrangements to limit tax liability.
  • Privacy and Asset Protection: States like Nevada and Wyoming provide enhanced privacy for LLC members, which can be beneficial for high-value assets like aircraft.

However, note that forming an LLC in one state and operating the aircraft primarily in another may create nexus issues, exposing the entity to taxes in multiple states. Consulting with an aviation attorney or tax professional is crucial to navigate these complexities.

Frequently Asked Questions

  • Can LLC members lease the aircraft to themselves?
    Yes, through a dry lease structure, which allows members to use the aircraft without the LLC providing a crew. However, the lease must comply with FAA regulations to avoid being classified as a commercial operation.
  • Who owns the aircraft in an aircraft LLC?
    The LLC itself owns the aircraft, not the individual members. This distinction is vital for maintaining limited liability and FAA compliance.
  • Do aircraft LLCs reduce tax liability?
    Yes, in some cases. An LLC may allow for tax deductions on depreciation and operating costs. However, proper structuring and intent of use are key to qualifying for these benefits.
  • What should be included in an aircraft LLC operating agreement?
    It should include provisions for flight scheduling, maintenance, insurance, FAA compliance, liability allocation, and dispute resolution.
  • Can an aircraft LLC be formed in a state different from where the aircraft is based?
    Yes, but doing so can lead to complications with taxes and registration. It’s important to weigh the benefits of favorable formation states against possible use tax in the aircraft's home state.

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