Ownership Structure-What did you do?

[HiFlyer]

I am curious as to how those on this site have structured the ownership of their aircraft. I realize that every state is different in it's laws and there are so many options out there...but what worked best for you and why did you decide to go that route?

 

I am currently getting ready to make an aircraft purchase and have been in contact with an aviation tax attorney here in California. He has suggested a few methods of ownership which would legally reduce my tax liability, especially since here in California they also charge an annual property tax which is equivalent to 1% of the fair market value of the aircraft in most counties. I'm sure many of us on this site own our aircraft under the protection of an LLC or Corporation formed in a state like Nevada or Delaware, but aside from the legal protection they offer, what other advantages/disadvantages have you discovered with them? How have the annual taxes worked out for you? If you had to do it again, what would you do?

[Jeff_S]

I bought mine under an LLC because I was seriously considering using it for business purposes at the time. As it turns out, that business never materialized and I have used it purely for personal travel and fun, so I have never tried to take a tax deduction. I think there is some potential benefit in protecting your personal assets against a catastrophic loss if the worst happens, but that may vary from state to state. About the only real benefit I've received by having it in the LLC is when I needed to bring on a very-minority partner in ownership of the plane so I could take over his hangar at the airport. For $1 I was able to list him on the LLC as a member and that satisfied the requirements.

[Earl]

Mine is owned by an LLC for a variety of reasons.  First of all, I use the airplane almost exclusively for business so there are definite tax advantages to being in an LLC.  Second, while you can never escape the liability of being the pilot, the LLC does provide a liability speed bump for the owner, especially if they are not the PIC.  You will hear any number of opinions on the wisdom of an LLC from "you're nuts not to do it" all the way to "it is a complete waste of time and money".  As with any decision like this, you will have to weigh the options, costs and benefits and make your own decision.  I will say that if you are just going to use the plane for recreational use an LLC is probably not going to be worth the extra cost and hassle.

 

Having said all that, the LLC comes with some additional costs and complications.  You have to deal with the issues of owning a corporation (registration, business license, insurance, bank account, etc.), an additional state and federal tax return, etc.  What is involved is very state dependent and the best thing to do is use one of those on-line companies that set up LLCs, unless you have an attorney friend that can help you.

[Jerry 5TJ]

We, too, sought the (costly) advice of an aviation attorney or two before creating a partnership in California to own an airplane.   In the end, we decided that a partnership made as much sense as anything, that an LLC which has as its sole asset an airplane offered few advantages and has potential FAA issues.   The CA sales tax treatment is mainly independent of ownership type; it depended on where the purchase took place (out of state is best), the first business use (ditto) and % of interstate commerce use in the test period (6 months for us).  CA property tax appears to depend on where you keep the plane, not where or how it is registered. 

Best luck!
 

[HiFlyer]

Jerry,

This is exactly what was suggested to us. Via the Interstate Commerce Act, if you can prove that greater than 50% of your flights are used in interstate commerce (note: this doesn't mean commercial flying, just the intended purpose of the trip), if the first use of the aircraft is out of state (delivered/ bill of sale signed out of state) and it can meet the 6 month test, you can be granted an exemption from sales tax in Cali. This is especially useful if you have business often held out of state or do a lot of investing in property outside of your home state.

[Bennett]

Over the years I've owned aircraft in LLCs, corporations (California and Delaware-twice), and various forms of partnerships, including a Public Service Charitable Non-Profit Corporation operating a Flying Club with several owned aircraft.   For my current aircraft, I talked to two advertising California tax advisor firms, and my own (business and personal) tax accountant, and decided that "gamesmanship" with the California Franchise Tax Board wasn't worth the expense to the advisory firms (between four and five thousand dollars), and the hoops to jump through to save the difference. If I owned a jet, it would be a different decision.  In some prior instances I was using my aircraft extensively for business, and I was able to easily fulfil the requirements of delivery out of state, a well documented first flight to a client out of state, and 50%+ of the first six month's flights for business purposes. (These rules change all the time, and that is what was required at that time).  Its either Sales Tax or Use Tax here in California; now approaching 10%, plus an annual Personal Property Tax.  Just makes aircraft ownership that much more expensive, and I can understand how this will, and does, drive people out of aviation.  Renting or Flying Club membership helps mask these costs, but they figure into the rental or hourly rates, and personally I have an aversion to trusting my life to maintenance folks I don't know, and are more interested in holding down costs, as opposed to my sort of zero defect professional maintenance by the best shops and staff I know. Moreover, renting aircraft (or club membership) can be a form of Russian Roulette where the prior pilot doesn't report or squawk a problem such as a "hard landing". I once rented an aircraft from a "reputable" FBO who told me the airplane was still airworthy after I pointed out to the owner that one of the main wheel tires had flat spotted, with the cords showing.  I had rolled the aircraft forward as part of my pre-flight to check the tires all around (wheel pants hid most of the tire and wheel) to make certain the tires were in acceptable shape. I obviously cancelled my reservation, and never rented from that FBO again.  On another occasion I was preflighting a club aircraft and I noticed a bowing of the propeller with some tip scrape marks.  I called the prior pilot, who after some hard, spirited, questioning, admitted to a hard, bounced, landing, and "maybe there was just a bit of a prop strike".  I grounded the aircraft, and the subsequent engine teardown and propeller replacement cost many thousands of dollars. She was the second pilot in that ten person club who had a prop strike within one year. I soon sold my ownership interest in the flying club.  The only way to insure the quality of maintenance, and the knowledge of the aircraft's recent flight history, is to own your own airplane, lock the hangar, and keep the keys in your pocket. 

[HiFlyer]

For those of you that own an aircraft in an LLC strictly for the legal protection of it, how do you handle taxes at the end of the year? I understand that you have to file a return, however if the aircraft has not been used for commercial purposes and generated zero revenue, are you still taxed in any way or is filing simply a formality?

[OR75]

For those of you that own an aircraft in an LLC strictly for the legal protection of it, how do you handle taxes at the end of the year? I understand that you have to file a return, however if the aircraft has not been used for commercial purposes and generated zero revenue, are you still taxed in any way or is filing simply a formality?

 

Nowhere near a legal expert here.

However, I doubt a court would buy into the idea of an LLC providing legal protection if the aircraft has not really been used for business with returns and income statements to show it.  (unless the suing party lawyers is highly incompetent)

[Earl]

For those of you that own an aircraft in an LLC strictly for the legal protection of it, how do you handle taxes at the end of the year? I understand that you have to file a return, however if the aircraft has not been used for commercial purposes and generated zero revenue, are you still taxed in any way or is filing simply a formality?

Start with a disclaimer that I am not an attorney or tax accountant but I own a number of businesses, including the LLC that owns my Mooney.  If you own an LLC and it has a taxpayer ID number (FEIN or the state equivalent) you will need to submit state and federal tax returns each year.  Depending on how it is structured (most are treated as a partnership for tax purposes) any losses or gains will be reported as taxable income (or loss) to the shareholders (or members) per their ownership percentage (called a K-1).

 

The issue is whether the LLC is a sham corporation because there is no income and it is not really a business.  If I recall there is a finite number of years that you can report a business with no income but with business expenses which you want to deduct and generate a loss for tax purposes.  Expenses in a legitimate business like this include things like maintenance, fuel, insurance, depreciation, hangar/tie down, equipment upgrades (which may be capitalized), etc.  My thinking is that if the LLC will never generate any income then I do not think its worth it.  If however, you want to pay an hourly rate to the LLC for using the airplane then at least you may have the income side sorted out.

 

I think AOPA has some resources about this issue that you may want to explore.

[Earl]

Nowhere near a legal expert here.

However, I doubt a court would buy into the idea of an LLC providing legal protection if the aircraft has not really been used for business with returns and income statements to show it.  (unless the suing party lawyers is highly incompetent)

I'm not an attorney either but I suspect you are right that a good lawyer could pretty easily pierce the corporate veil if the LLC is not really a functioning business.  You have to be very careful with corporate governance to make sure you maintain the veil, such as it is.  One thing to remember is there are two sources of liability, the owner and the PIC.  You can have all the LLC's in the world but if you are PIC you will have liability regardless of ownership.  That is why I do not take fellow employees in the plane because the liability risk is too high.

[jlunseth]

An LLC provides no protection if you are the pilot. You need to focus on covering possible liability (good insurance) rather than dodging.

[Parker_Woodruff]

Your best protection and defense is liability insurance with high limits (as high as available / makes sense for you).

 

I carry a limit that includes passengers (no sublimit) well in excess of my plane's value and my net worth.  The plane is registered in my name as I presently have no direct business use for it.  I am reimbursed by my employer for mileage.

[jlunseth]

Ditto.

I understand Parker sells aircraft ins. and is really good, it is time for me to re-up,so Parker, pm sent.

Also, take the money you were going to spend on formation of the LLC and spend it on training so you don't have an accident to begin with. Best overall strategy for liability avoidance there is.

[HiFlyer]

In reading the responses, I suppose I phrased the question incorrectly. I had fully expected the LLC to "charge" an hourly rate for the use of the aircraft, I was just wondering about the tax implications of doing so. I imagine that is the operating expenses are XXX and the LLC charges XXX, then the net profit from the "income" generated by the LLC is zero...probably over simplified, but is this off base? 

 

I'm surprised at those who say that the best protection is a simply a good insurance policy...it just goes against what seems to be a very popular way of "protecting" one's other assets. What about those of you who have businesses? Do you really trust that the assets of your company will be protected/covered by just the insurance companies if you hit the proverbial "bus full of nuns" on the runway and you are sued?