Because of liability concerns, most aircraft owners seek to create a business entity and own the aircraft under a business name. Creating a business entity to own and operate the aircraft is a matter of personal choice, but it will have implications for the purchase, sale and operation of your aircraft. Each type of legal entity offers tradeoffs in terms of operational flexibility, taxes and liability. The choice of ownership is complex, and it’s advisable to seek the guidance of an experienced lawyer in the area of aviation business formation.
Types of Ownership
There are several types of ownership - sole proprietorship, partnership, corporations, and limited liability companies.
Sole Proprietorship
In a sole proprietorship, the simplest entity to create, no paperwork is required other than the permits and licenses that all newly-created business entities must complete. The sole proprietorship can be run under your name, such as “Susan Jones,” or under a fictitious name such as “Jones’ Flying Lessons.”
Few tax advantages are offered by a sole proprietorship. In the eyes of the Internal Revenue Service, there is no difference between a sole proprietorship and the individual who owns it. In fact, the owner of a sole proprietorship reports business income or losses on his or her IRS Form 1040, on Schedule C.
Neither does a sole proprietorship offer total liability protection. If a lawsuit is brought against you and the damages awarded exceed your insurance coverage, you will be held responsible for the remaining balance.
General and Limited Partnerships
A partnership is a business between two or more people. Very little paperwork beyond the initial permits and licensing is required, though a partnership agreement is highly recommended that sets forth each party's contributions, authority and duties. The value of creating a partnership is pass-through tax advantages and divided costs. As in a sole proprietorship, there is a lack of personal liability protection for a general partnership. A limited partnership has more protection, though limited partners have relatively little influence or management opportunity.
S Corporations and C Corporations
Businesses such as fixed-based operators and flight schools may find the creation of S and C Corporations to be advantageous for their businesses, balancing liability protection and tax advantages. Corporations may be complex to operate, however, and require approval of the IRS. Shareholders of S corporations receive personal liability protection if the business is operated according to proper corporate standards and formalities. C corporations are what most people think of as a “regular corporation.”
Limited Liability Companies
A Limited Liability Company (LLC) is unique in that it is a hybrid, providing the flexibility of a partnership with the asset protection of a corporation. Limited liability means that the individual assets of the members of the LLC cannot be used to satisfy the LLC’s debts and obligations. As a member of an LLC, your risk of loss is limited to the amount that you invested in the business. Note however, that limited liability is not absolute. If a member guarantees the obligations of the business or co-signs a loan, then the member’s assets are at risk. Also, a court can disregard the LLC’s existence (“pierce the corporate veil”) and reach the member’s assets if the member did not treat the LLC as a separate entity, or where it otherwise would be considered unfair to treat the member and company separately.
Contact Lento Law To Help You With Your Business Formation
The type of business entity you create has many implications for the purchase, sale, and operation of your aircraft. Selecting the wrong type of business entity can expose you to high taxes and financial liability. Contact Lento Law today to help you with your aviation business formation in the most advantageous way possible.