Take a quick look at the FAAs aircraft registration roles and youll see something curious: A lot of Cherokees are owned by corporations.
Its not that General Motors or GE are using the little Pipers as personal air taxis but that many owners structure aircraft ownership in corporate rather than sole owner or partnership arrangements. The general thinking here is that having a corporation own the airplane provides certain legal protection in the event of an accident.
True? Yes, it is true. However, along with that protection come certain expenses and responsibilities. In other words, forming a corporation with the airplane as the chief asset doesnt come for free. Nonetheless, corporate ownership is probably worth the effort, especially if the airplane is owned by several people.
Partnership or Corporation?
Heres the scenario: You and some friends decide to buy an airplane together, you work hard to find a good one and now, after the pre-purchase inspection, youre ready to make the buy.
What does it matter to you and your co-owners whether you own it as a partnership or corporation? Besides the legal protections alluded to above-and more on that later-there may also be certain tax advantages. So before you ink the title-even before you decide to do the deal at all-consider the advantages of both kinds of ownership.
Admittedly, a partnership is the easier method of owning an airplane. List the co-owners on the sale documents when the airplane is purchased, pay your states sales or use tax-if your state has such things, as most do-and youre done. Youre now partners in a flying machine.
Worth remembering is that partnerships always have a human dimension, which is a polite way of saying they sometimes explode due to incompatible partner interests. You can minimize surprises by writing a detailed partnership agreement that says who is responsible for what and how youll operate, maintain and schedule the airplane.
Further, you should also clearly spell out what each ownership share is worth and how shares can be bought or sold if someone decides to exit the partnership, voluntarily or otherwise. If you maintain maintenance or engine funds, these have value and your partnership agreement should spell out how that value will be disbursed when the airplane is sold.
A written and signed partnership agreement is as enforceable as a contract, since it is in effect a contract. Partnership agreements abound but a good place to start is the boilerplate agreement offered on the AOPA Web site at www.aopa.org/members/files/guides/multiple.html.
Although broad, this partnership agreement is quite detailed and covers most of the basics. Youll have to add your own particulars, however.
Partnership Downsides
Although simple and quick to formulate, the shortcoming of a partnership is that each partner is liable for the actions of the others. If one of your partners has an accident and hurts or kills someone, you are potentially just as liable as was the guy flying. If the group of you made a decision not to comply with a service bulletin, for example, and the oversight leads to an accident, you may find yourself personally liable.
But thats why you have insurance, right? Sure, insurance covers that risk. But can you get enough? In the current hard insurance market, most owners are carrying insurance with $100,000 per person sublimits, even if the overall policy limit is $1 million.
Bluntly, $100,000 isnt squat if youre at that station in life where you can afford to own an airplane, or even just a piece of one. As a part owner, you may be on the hook personally for any additional damages. Our recommendation is that unless your group can purchase a policy with at least $1 million smooth coverage-smooth meaning no sublimits on each seat-dont even consider owning an airplane in a partnership. The risk is simply too high.
The Tax Angle
If one of the co-owners sells his or her interest in the airplane, the ownership structure has changed and along with it, so does the title. That means filling out a new bill of sale and application for registration.
In most states, the sale triggers a sales or use tax. The tax due may just be on the ownership share that changed hands rather than on the full value of the airplane. But before you make a decision to own as partners, check to see how your state deals with such a partial sale. The state may have a benign policy in this regard or you could be looking at several thousand dollars in use or personal property taxes.
If you do charitable flying as a partner, the IRS and FAA have deemed that you may only deduct the cost for gas, oil and landing fees when you own the airplane in a partnership arrangement. Other operating costs-maintenance, upgrades, insurance, tiedown or hangar-are on your dime.
On the Other Hand
Corporations came about in the first place to provide some means of putting a cap on the potential liability of investors in a business. If a corporation goes under or is found liable for hurting someone, the shareholders stand only to lose the money they spent on their stock. This is a fundamental foundation of U.S. law that applies to airplane ownership, too.
If you and your friends went through the formalities of forming a corporation, purchased stock in that corporation to capitalize it and then use that capital to buy an airplane, you are not personally liable if one of the other shareholders crashes the airplane and causes an injury.
Its nearly impossible for someone who sues the corporation to pierce the so-called corporate veil and get at the personal assets of the shareholders, as long as the corporation has some assets, such as an aircraft and, especially, insurance. A corporation is not a magic bullet, however; youre still liable if you go stupid as pilot in command and hurt someone. In other words, if the homeowner whose roof you destroy with your airplane following fuel exhaustion wants to sue you personally, he can. But he cant go after your fellow shareholders.
While we still recommend minimum liability coverage of $1 million smooth, a corporation gives you more protection if youre stuck with a policy with $100,000 sublimits and another shareholder wrecks the airplane.
Which Type?
All corporations share the protection of limits on individual liability. The differences are generally in the way theyre treated for tax purposes. Discussing the nuances would take more space than we have for this article and would bore you to tears anyway.
Suffice to say that a Limited Liability Corporation (LLC) is probably the most suitable for aircraft ownership, as income and losses are passed directly on to the shareholders. Your accountant can tell you the best corporation structure for your income situation.
It will cost you about $400 to $600 to form a corporation or less if you use one of the Delaware corporation agents. ( www.state.de.us/corp/corp.htm) Youll have to comply with some fairly minimal annual reporting requirements and the corporation will have to file a tax return. And thats where the additional expense and administrative hassle comes in, to the tune of a few hundred bucks a year for the tax return.
If one person wants out of the airplane, he or she simply sells his share to the person coming in or back to the corporation. The sale of shares is not a taxable event from a sales or use tax perspective. And, of course, you havent sold the airplane. It remains an asset of the corporation.
If youre the person selling your shares in the corporation and you get more for them than you paid, you may have to pay income tax. But thats the same tax liability youd have if you were a partner or got more for your proportion of the airplane than you paid.
If all of the shareholders decide to sell the airplane, you may decide to sell the corporation itself, as that may increase its value to the buyers since youre saving them the hassle of setting up their own corporation. Again, transferring the aircraft in this manner has pros and cons.
Be prepared to show the corporate books to the buyers so they know that the corporation is free of debt or, if not, how the debt is structured and whos responsible for it.
In this type of ownership transfer, all that happens is that there are new corporate officers and stockholders but the airplanes title undergoes no amendments, since the airplane wasnt sold. The FAA is merely advised of the new mailing address of the corporation.
If the airplane stays in the same state, theres no sales or use tax effect. If the airplane goes to another state, the physical relocation of the airplane may trigger a use tax, but that varies from state to state. Explore this with the appropriate tax department before moving the aircraft to a new home.
Insurance Considerations
Youll have to name the corporation as an insured on the airplane policy, just as each shareholder/pilot is named. The insurance policy is an asset of the corporation. If theres an accident, the corporation, as owner of the airplane, as well as the shareholder who was the pilot, may be sued.
The policy covers both persons, since a corporation is considered a legal person. Weve never heard of an insurance underwriter balking at naming the corporation that owns the airplane as an insured in addition to the shareholder/pilots. The corporate entity does not fly the airplane so it adds nothing to the risk of loss for the insurance company.
When you, as a shareholder, fly the airplane, you are renting it from the corporation. If youre doing any flying that qualifies for a charitable deduction, you can deduct the entire cost of the rental, not just the fuel and oil.
Youll have to keep track of the finances of the airplane for the tax return so your accountant can provide the IRS with the necessary supporting data. There are a number of ways to do this, from simple paper logs to computer programs that require entries for each line item of expense.
The more detailed the expense logging is, the better. (One cheap paper log is the Truthan Aircraft Expense System at $14.95, phone 616-942-6348 or www.aircraftexpense.com).
Which Way, Doc?
Do we have a recommendation? Having owned aircraft both ways, and even though we dont like the hassle of an annual income tax return, we recommend incorporation as the basic ownership strategy. This advice applies whether youre the sole owner of the airplane or have it in group ownership with others.
Now that high-limits insurance is all but impossible to get even if you can afford it, the protection provided by corporate ownership is worth the trouble and expense. The side benefit is that youll tend to track the real costs of ownership of the airplane more realistically so it will be easier for the co-owners to make intelligent decisions on what to charge themselves for using the airplane.
And even though you may not want to know what that bottom line number is, at least youll have it available.
Also With This Article
Click here to view “Insurance Has Its Limitations.”
-By Rick Durden
Rick Durden is an attorney, CFII and contributing editor to Aviation Consumer.
