Aircraft owners often use limited liability companies (“LLCs”) to hold legal title to their aircraft. There are a number of benefits for holding title to aircraft in an LLC, but it is essential to consider all critical factors when deciding on what type of business entity should ultimately hold title. This article lays out below the pros and cons of holding aircraft title in an LLC.
Pros of Holding Aircraft Title in LLC
There are several reasons why holding your aircraft title in an LLC makes sense, particularly: (1) Limited Liability, (2) Tax Considerations, (3) Estate Planning, (4) Flexibility, and (5) Confidentiality.
1. Limited Liability
Personal liability protection is the primary reason for placing an aircraft’s title in an LLC. LLCs are treated as separate legal entities from their owners under U.S. state law, thus, acting as a shield to protect the assets of its owners (also called “members”) from any debts or liabilities the LLC may suffer. In other words, creditors or litigants cannot attack LLC members personally, and assert their rights or claims against an LLC members’ homes, vehicles, bank accounts, or other assets to pay a debt or other liability related to the LLC.
2. Tax Considerations
LLCs provide significant flexibility with respect to Federal income taxation. For example, an LLC can elect to be taxed as (a) a single-member disregarded entity (b) a partnership, (c) an s-corporation, or (d) a c-corporation. Each of (a)-(c) provide for “pass-through” taxation, meaning the LLC itself does not pay Federal income taxes as a business; instead, any business income or loss is passed through to the LLC members, and then the members report that income or loss on their personal income tax returns. Additionally, depending on the use of the aircraft, and if the LLC is set up correctly, members may be entitled to better tax deductions. For example, we often assist aircraft owners in holding title to their aircraft in an LLC so the owner can utilize the purchase-for-resale exemption to minimize state sales and use tax. In addition, LLC’s may be able to deduct depreciation and operating expenses as additional tax benefits.
3. Estate Planning
Holding aircraft title in an LLC is one way to estate plan for an aircraft. When structured appropriately, a member can hold aircraft title in an LLC with other heirs subject to an operating agreement that contains certain provisions granting the deceased member’s interest in the LLC to the other then-living member(s) upon death. Under this scenario, the living heirs would assume greater ownership of the aircraft without any transfer of legal title to the aircraft.
4. Flexibility
Compared to corporations or trusts, LLCs typically have fewer corporate governance requirements. Generally, LLCs may choose their own management structures and are not mandated by state law to manage the entity through a board of directors and officers. In addition, LLC operating agreements significantly favor freedom of contract giving aircraft owners almost limitless freedom to contract around liability, management obligations, and allocation of expenses.
5. Confidentiality (State Dependent)
If protecting your privacy and not publicly disclosing company ownership information is an important consideration, aircraft owners should consider holding title to their aircraft in an “anonymous LLC”. Anonymous LLCs are permitted in at least four states (e.g., Delaware, Nevada, New Mexico, and Wyoming), though owners should note that each state has unique requirements that vary and should be followed.
Cons of Holding Aircraft Title in LLC
Depending on your intended use of the aircraft, the cons of holding your aircraft’s title in an LLC may outweigh the pros. The two primary concerns with holding title in an LLC are (1) The Flight Department Company Trap, and (2) Exceptions to the LLC Shield.
1. Beware the Flight Department Company Trap / Illegal Charter
Most private aircraft purchasers that use LLCs to hold title to their aircraft intend to use the aircraft for non-commercial purposes under Federal Aviation Regulations (“FAR”) Part 91. Under FAR Part 91, LLCs can dry lease aircraft to a third party business or individual. However, if the LLC provides pilot services together with the aircraft, the FAA is likely to declare that as an illegal wet lease or air charter operation and require all flights to operate under FAR Part 135, which has different requirements than FAR Part 91. This is what’s commonly referred to as the “Flight Department Company Trap.” Suppose the FAA determines that the LLC should have been operating under FAR Part 135, not FAR Part 91. In that case, significant negative consequences can occur such as heavy fines, insurance being voided due to illegal operations, and the IRS seeking an additional 7.5% Federal Excise Tax (FET) liability on all flight income paid to the LLC. The primary purpose behind choosing an LLC is for the limited liability coverage. If the FAA determines an LLC has engaged in the Flight Department Company Trap, the entire purpose of the business structure can be negated.
2. Exceptions to the LLC Shield
The LLC liability shield may be pierced in certain scenarios, including: (1) if you are acting as a pilot of a FAR Part 91 flight and you act negligently or unlawfully, (2) if your aircraft fails to comply with an airworthiness condition, or (3) creditors or litigants “pierce the corporate veil” which can be done when certain corporate formalities are not followed. If the LLC’s “corporate veil is pierced,” LLC members can be held personally liable.
If you would like to know whether an LLC is the right type of entity to hold title to your aircraft, or if you would like to hold title to your aircraft in an LLC, please call us at the number below or email us at Counsel@BizjetLaw.com.