LLC ownership structure and pursuit of commercial certificate.?

[4RNB]

We have been considering putting out plane into an LLC to protect assets in case of a lawsuit but had not heard of this needing to be done when engaging in a business pursuit. For our farm this is an easy explanation, not so much for the plane. One of the things suggested is that if I were to get a commercial certificate and/or go CFI then it could be thought of as being in pursuit of business and the LLC argument could be made.

How many of you keep your plane in an LLC or other legal structure that helps protect personal assets? How are you in a business pursuit with the plane? Is it a hassle

On a similar vein, my motivation to go commercial comes and goes. I never need to work again but think to go this route for fun so I can take advantage of any doors that might be open. No real desire to work for the airlines. Maybe instruct or work corporate or private owner. Any thoughts on this?

Thanks, I'll take my answer off the air.

 

[FORANE]

I've always heard/ read the LLC, or other corporate entities, don't afford protection for your own actions. So if you're instructing you're at risk regardless. Now if you have a partner, that changes the equasion. In that case, an LLC may afford you protection from liability arising from his actions.

 

[midlifeflyer]

but had not heard of this needing to be done when engaging in a business pursuit

The original purpose of an LLC is to limit contractual liability in business pursuits. Even there, there are both practical and legal limitations. It extends to protecting one member of the company from liabilities created by another. If another member of the LLC causes an accident, I am protected (with exceptions).

An LLC does exactly zero to legally protect you from liability if you cause an accident and injure someone or their property. My favorite example - the UPS driver who causes an accident is personally liable for the damage. What protects that driver is the ability of UPS to pay the claim - practical, not legal protection.

There is some asset protection built into the LLC structure but, generally speaking, (a) the amount of protection varies a lot depending on the state and (b) it protects the assets owned by the LLC, not the assets owned by the human who causes the accident.

Asset protection is a complex subject best discussed with an estate/financial planning legal professional.

 

[Jim K]

I didn't put my plane into an llc, but i wish I had for a couple reasons.

First, in Illinois, the state issued a letter stating that transferring a plane from an individual to an LLC triggers the use tax again, even if the individual already paid it, so I'd have to pay 6.25% of the FMV to do it now. That means I'm limited (or will have to pay the tax) if I want to take on a partner or lease the plane to a club, neither of which i want to do with it in my name only.

Secondly, and the main reason, is for tax deductibility of the plane's real expenses. I do a fair number of charitable flights, as well as a little bit of business travel. I'm limited to deducting consumables... fuel & oil for these trips. If the plane was held by another entity, I could rent the plane from that entity and deduct the entire rental. Of course then the llc pays taxes on that money, but it can deduct hangar, maintenance, insurance, and depreciation. It might even be worth it to pay the use tax to do this, but when I consider the extra complexity i decided not to do it. I also worry that it might make me a more attractive target for an audit. I have heard that farmers trying to deduct planes as part of the business is a red flag to the irs.

 

[midlifeflyer]

I didn't put my plane into an llc, but i wish I had for a couple reasons.

First, in Illinois, the state issued a letter stating that transferring a plane from an individual to an LLC triggers the use tax again, even if the individual already paid it, so I'd have to pay 6.25% of the FMV to do it now. That means I'm limited (or will have to pay the tax) if I want to take on a partner or lease the plane to a club, neither of which i want to do with it in my name only.

Secondly, and the main reason, is for tax deductibility of the plane's real expenses. I do a fair number of charitable flights, as well as a little bit of business travel. I'm limited to deducting consumables... fuel & oil for these trips. If the plane was held by another entity, I could rent the plane from that entity and deduct the entire rental. Of course then the llc pays taxes on that money, but it can deduct hangar, maintenance, insurance, and depreciation. It might even be worth it to pay the use tax to do this, but when I consider the extra complexity i decided not to do it. I also worry that it might make me a more attractive target for an audit. I have heard that farmers trying to deduct planes as part of the business is a red flag to the irs.

Great example of the complexity of this decision. In some states, even if a new use tax is not an issue, there may be sales tax on each rental which doesn't get offset by deductions. There may even be a deductibility issue. Not being a tax expert, I am not sure about this but if an LLC is a disregarded entity for federal tax purposes, is there really any difference in the deductibility of business-related expenses?

 

[Jim K]

Not being a tax expert, I am not sure about this but if an LLC is a disregarded entity for federal tax purposes, is there really any difference in the deductibility of business-related expenses?

I'm not a tax expert either, but I do my own, which is the main reason I'm paranoid about not making myself an attractive target for an audit. As I understand it (I have never owned an LLC), the finances of the LLC flow through to the owners, but the owners can also elect to treat it as its own entity. I THINK the LLC income/expenses are still reported as part of the owner's personal taxes, but it's a separate form that splits it out like an S corp, so it doesn't look like you're trying to make it an asset of another business you own.

 

[midlifeflyer]

I'm not a tax expert either, but I do my own, which is the main reason I'm paranoid about not making myself an attractive target for an audit. As I understand it (I have never owned an LLC), the finances of the LLC flow through to the owners, but the owners can elect to treat it as its own entity. I THINK the LLC income/expenses are still reported as part of the owner's personal taxes, but it's a separate form that splits it out like an S corp, so it doesn't look like you're trying to make it an asset of another business you own.

Yes it is like an S-Corp - basically taxed as a partnership when there are multiple members and as an individual if there is only one member. (I've been the sole member of an LLC-it's just basic Schedule C). OTOH, the members can elect to have an LLC taxed like a C-corporation in which it's all separate, and accept the potential double taxation penalty - taxed at both the corporate (income) and individual (dividend) level.

 

[4RNB]

The intent of the LLC (other than earning money) is to limit our attractiveness as lawsuit targets. As discussed in the following:

 

[flyingron]

The video is wrong about the strawman he throws in about the supercar. While the car may be protected, the membership in the LLC is an asset and you can certainly lose that (and in turn whatever interest you have in the car).

As pointed out there are some states that have very oppressive tax issues with either the transfer into the LLC or even the ongoing maintenance of the LLC. About the only benefit a single member LLC gets is to make it slightly more obscure as to who the beneficial owner really is, but even to do that you need to be careful.

 

[mandm]

I'm not a tax expert either, but I do my own, which is the main reason I'm paranoid about not making myself an attractive target for an audit. As I understand it (I have never owned an LLC), the finances of the LLC flow through to the owners, but the owners can also elect to treat it as its own entity. I THINK the LLC income/expenses are still reported as part of the owner's personal taxes, but it's a separate form that splits it out like an S corp, so it doesn't look like you're trying to make it an asset of another business you own.

To protect yourself from a LLC, it is important to have funds separate from the LLC and yourself, aka, do not commingle funds.

And like someone else said, if you are flying the airplane then you are personally responsible. Now I do wonder if you can make an employment contract so that you are acting as an agent of the company. Such as if you went to a store and an employee caused a slip and fall, the employer would be responsible and not the employee.

Now with regards to funds, you can send money back and forth, contributions and dividends or loans and repayment, so that is not a limitation but you do want separate books and separate bank accounts.

The point of an LLC can protect you if something happens when your airplane is in storage, let’s say a fire at your hangar damages another hangar / airplane / person. Also there is the privacy aspect, you can form an LLC in a privacy friendly jurisdiction that meets your needs. You do not have to have one in your state so do look around to see what suits you. Some people might be mad at you for something (you or your airplane) and then start searching your name, then they find out this and that and who knows what search they will go on with all of those hungry lawyers out there. The risk is low, but it is very real and laws are not out there to protect you. Fighting a lawsuit can be costly.

Also, sometimes the beneficial owner is not readily available depending upon your state. If they cannot find you, quite difficult to extract money from you. But if your name goes into Google and we see 2 airplanes, 10 houses, cars, etc. Then it’s worth seeing if one can get a payout as you have something to lose.

 

[midlifeflyer]

And like someone else said, if you are flying the airplane then you are personally responsible. Now I do wonder if you can make an employment contract so that you are acting as an agent of the company. Such as if you went to a store and an employee caused a slip and fall, the employer would be responsible and not the employee.

The employee in your scenario is still legally responsible. The employment/agency relationship adds liability for the employer/principal. It does not remove the actor’s personal liability. The employee is protected because the employer pays it. If the employer, say, goes bankrupt and has no insurance, the employee is left holding the bag.

 

[4RNB]

To protect yourself from a LLC, it is important to have funds separate from the LLC and yourself, aka, do not commingle funds.

And like someone else said, if you are flying the airplane then you are personally responsible. Now I do wonder if you can make an employment contract so that you are acting as an agent of the company. Such as if you went to a store and an employee caused a slip and fall, the employer would be responsible and not the employee.

Now with regards to funds, you can send money back and forth, contributions and dividends or loans and repayment, so that is not a limitation but you do want separate books and separate bank accounts.

The point of an LLC can protect you if something happens when your airplane is in storage, let’s say a fire at your hangar damages another hangar / airplane / person. Also there is the privacy aspect, you can form an LLC in a privacy friendly jurisdiction that meets your needs. You do not have to have one in your state so do look around to see what suits you. Some people might be mad at you for something (you or your airplane) and then start searching your name, then they find out this and that and who knows what search they will go on with all of those hungry lawyers out there. The risk is low, but it is very real and laws are not out there to protect you. Fighting a lawsuit can be costly.

Also, sometimes the beneficial owner is not readily available depending upon your state. If they cannot find you, quite difficult to extract money from you. But if your name goes into Google and we see 2 airplanes, 10 houses, cars, etc. Then it’s worth seeing if one can get a payout as you have something to lose.

This is not about responsibility for a flying problem.

This is about generalized asset protection in life. If it is difficult to understand, ignore the airplane LLC and answer it as if it were for a mom and pop business selling knick knacks.

The point of the LLC is that if a lawsuit happy person comes to my house, falls down and gets injured, thinks about legal action and getting $$$. My understanding of this is that a lawyer would evaluate the target $$$ to determine if they take the case. An airplane in an LLC would not be recoverable. THAT IS THE POINT. So we are thinking about moving our farm and real estate assets into an LLC, and considering doing so with our airplane. Own nothing, control everything, and have a small target on our back.

Thus, my original questions...How many of you keep your plane in an LLC or other legal structure that helps protect personal assets? How are you in a business pursuit with the plane? Is it a hassle?

Should anyone discuss this further but desire privacy, PMs welcome. I'll even give you my phone number to discuss.

 

[FORANE]

My plane is owned by a LLC. The LLC at one point owned a bunch of apartments also. Now that I've sold all the apartments the plane is all that's left in the LLC. It costs a small annual fee to maintain the LLC. I considered transferring the plane to my name (I don't instruct in it) but my state advised transferring the plane from a single member LLC to the same individual would be treated as a sale. That sale would trigger another sales tax due. So, the plane remains in my LLC.

 

[midlifeflyer]

An airplane in an LLC would not be recoverable

Why not? What’s your legal analysis if the situation? Look at @flyingron’s post.

You cause an accident. Multiple injuries, well above your insurance. Lawyer does an asset check and finds you are sole member of an LLC that owns a late model Piper Meridian with a whole bunch of equity. What stops the lawyer from suing you, getting a judgment, then executing judgment by taking your membership interest?

(The answer depends on the state and other factors, but we’re talking generalities here.)

 

[moparrob66]

I registered my plane to an LLC but I need to learn more about tax advantages. I dont make enough money to really need a tax break, but anything helps as long as it doesnt trigger an audit.

 

[midlifeflyer]

I registered my plane to an LLC but I need to learn more about tax advantages. I dont make enough money to really need a tax break, but anything helps as long as it doesnt trigger an audit.

Sit down with an accountant who understand aircraft ownership. If this is your typical sole ownership primarily for personal use, I suspect you will find there is no tax advantage and in many states, a disadvantage in terms of fees which you would not have to pay if not an registered entity.

 

[flyingron]

The most preferential tax treatment for a single member LLC is to leave it a disregarded entity. This still is worse than personal ownership in many states.

Even with multiple owners the LLC isn’t going to help on taxes.