Airplane Partnership Agreement

[iamtheari]

I'm sure many people here have had some experience with being joint owners of a plane. I am considering getting into a 50/50 ownership opportunity and I want to have a fair arrangement for both of us.

My major concern comes from the fact that some costs are purely calendar-driven, others are purely hour-driven, and many others are somewhere in between. For example, if you hit a dry spell for a few years where only one guy flies the plane but he doesn't fly it much (say 15 hours a year compared to the other guy's 0), the engine will likely need an overhaul before it reaches TBO, but the guy who was at least making an effort to keep it running might unfairly have to pay 100% of the overhaul cost just because his partner didn't fly at all and their agreement divides maintenance based solely on hours of use.

I have seen planes neglected because the majority of the owners were inactive, so they did not commit to a needed engine overhaul. The result is that the plane just gets neglected more. I don't want that to happen to my investment. Of course, rule #1 in partnerships is knowing and trusting your partner, but I always try to have viable alternatives to best-case scenarios, which drives me to plan for situations where one of us loses his medical or can't afford to fly and the other guy doesn't want to invest 100% of the costs in a 50% investment. So, if anyone has some advice on this topic from their specific experience (including agreement terms that you regretted having, regretted not having, or loved to have), please send it along. Thanks!

 

[Tom-D]

If you are not friends enough with your partner to do this with a hand shake, don't do it.

When they are a dick enough to require a written contract, they are dick enough to get a lawyer and hold you to it.

 

[midlifeflyer]

If you are not friends enough with your partner to sit down and give some serious thought to these questions and put your agreement in writing to avoid misunderstandings and problems in the future, don't do it. You are putting your friendship in unnecessary danger.

 

[iamtheari]

If you are not friends enough with your partner to do this with a hand shake, don't do it.

Good advice. Assume we are friends enough to do it with a handshake but want to put it on paper to keep any potential disagreements about the plane from ruining that. I kind of subscribe to the Bender Bending Rodriguez philosophy: "My usual fee is $500, but seeing as we're friends, I'm gonna need that up front." I've certainly "lost" money to maintain friendships, but airplanes aren't the place to risk having to make that choice.

 

[denverpilot]

If you're this worried about it, I highly recommend using an aviation-knowledgeable attorney for this sort of planning.

Most co-ownerships (here's a lawyer-input item for you: NEVER call it a partnership in public, if it's not legally built as a partnership, it can be used -- amongst many other things, and it's really easy these days -- to "pierce the corporate veil" to go after all co-owners for liability of actions of a single co-owner) usually have basic stuff people are worried about listed in their by-laws (which can be amended by a majority vote in most States, and/or depending on how the incorporation is defined) and covered that way.

The biggest problem you have on a two-way co-ownership is that there's no "tie-breaker" vote. In a three-way or more odd-numbered co-ownership, there's always a tie-breaker vote to "fix" things, or make them worse.

Your specific scenario, one co-owner out of two not flying enough and causing a serious maintenance issue, isn't all that likely. BOTH co-owners not flying enough, is more likely. It's not hard for one owner to fly the plane a couple of hours a week, and generally that's going to be "enough" to keep things working. IMHO anyway.

Plus, most co-ownerships and clubs (most, not all) base overhauls and larger items out of an "engine fund" that's based on hours flown, anyway... so the guy flying is STILL going to have paid for more of it than the people not flying... if you think about that for a minute...

 

[edo2000]

It sounds like you have a pretty good handle on the issues. I was a 50/50 partner for decades on several different aircraft with my brother. We bought the first when we were still in our teens learning to fly. Never had a partnership contract but we did have the trust thing. Definitely, you would want a contract with specific language on what happens if a partner wants or needs to get out of the arrangement. Or, as you say, what happens if a partner does not pay his 1/2 of maintenance and fixed costs. In my opinion, the pilot who flies more hours in a 50/50 partnership should not have to pay a higher percentage of maintenance costs, as long as the aircraft is available to both pilots equally.

 

[midlifeflyer]

@iamtheari, you are going through a good thought process. There are multiple ways pilot co-ownership arrangements have handled these questions and others.

For example, no one says you have to divide all costs based on hours of use. You guys can agree to anything you both think is fair. I've seen 50-50 splits on everything regardless of relative hours of use. I've seen percentages of non-fixed costs allocated in part for a 50/50 split and in part for an hourly use rate. When I client comes to me to put something like this together, I am usually asked, "what can we do?" My usual response is "what do you want to do?" yeah, I'll suggest some ideas, but it is up to them to do what they think is fair - now, not later when they are arguing about it because one of them wants the upgrade the GPS and the other doesn't.

Hopefully you will get some good ideas on how different people and approached this. And once you think you have something, do the unthinkable - sit down with a professional who knows what she is doing to put it together. You might be surprised at the other questions she asks.

 

[iamtheari]

For those who aren't attorneys, I would strongly echo all of the advice others have offered: Hire one. You can pay a lawyer $1,000 up front to help you form a proper corporate entity or write an agreement for joint individual owners, or you can pay a lawyer $50,000 to litigate through the problems you created by going cheap on the earlier opportunity. The second lawyer gets to have more fun at your much greater expense than the first one, but you should let his other clients provide that entertainment and save yourself the hassle.

Unfortunately, I am an attorney, so that means I will disregard the paragraph I just wrote and try to put this together myself rather than hunting down an aviation lawyer to help with it. (All the other pilot-attorneys I know have also been successful enough to keep the two separate, it seems.) I have great confidence in my ability to create a fair and effective agreement for any group of people to do any activity with any allocation of risks and rewards. It's pretty obvious that the rewards of co-owning an airplane can be allocated readily according to who wants to fly the thing. So I am here mostly looking for ideas of how to fairly allocate the risks (including costs).

But that being said, how about the choice between co-ownership by individuals and corporate ownership of the plane? It seems to me that it would be much more flexible and less paperwork-intensive to have a good LLC operating agreement that allows for incoming/outgoing members than to constantly re-register the airplane with the FAA every time you gain or lose an owner. That's obviously a bigger concern when you have more than 2 owners, but I know of airplanes that started with 2 owners and mushroomed into a half-dozen.

 

[Unit74]

Co ownership is just that. You want in? 50% of costs are yours. You wanna go hourly, go rent a plane. No doubt one person can get the shaft if he planes the "I haven't flown it" card.

Don't matter. You are co owner. Of course, he walks and leaves you hanging. But without a good agreement, you are on the hook.

 

[wsuffa]

Contracts are not (always) written for what happens in the ordinary course of action. They are written to spell out what happens when something goes wrong, or something major unexpected event happens. "Ordinary" can be agreed on a handshake - that can't happen if one party becomes incapacitated, gets hit by a bus, crashes the plane, etc. and is no longer around to be agreeable. Think of it as a pre-nup....

 

[denverpilot]

Don't matter. You are co owner. Of course, he walks and leaves you hanging. But without a good agreement, you are on the hook.

I know two owners who have been "left hanging". They both ended up with pretty nice aircraft after they repaired them and convinced whoever needed convincing that the other parties didn't pay for the repairs, so they'd take their pay-back in equity... as in, "Thanks, my airplane now." Right or wrong, with or without a contract, it happens regularly. One sat for three years while all that haggling was going on, though.

 

[Caramon13]

If you are not friends enough with your partner to do this with a hand shake, don't do it.
When they are a dick enough to require a written contract, they are dick enough to get a lawyer and hold you to it.

I fail to see how a written contract is a bad thing. Situations change, friends have issues, life isn't as simple as a handshake.

If your friend doesn't have the time to invest in signing a contract that will protect you BOTH in the event something goes south, find another friend.

 

[coloradobluesky]

Most attorneys wouldn't know how to structure an airplane ownership agreement. Need to find on that already has the "boilerplate". More people, more trouble. Trouble starts when someone cant pay their bill or wants out.

 

[midlifeflyer]

But that being said, how about the choice between co-ownership by individuals and corporate ownership of the plane? It seems to me that it would be much more flexible and less paperwork-intensive to have a good LLC operating agreement that allows for incoming/outgoing members than to constantly re-register the airplane with the FAA every time you gain or lose an owner. That's obviously a bigger concern when you have more than 2 owners, but I know of airplanes that started with 2 owners and mushroomed into a half-dozen.

As a lawyer who thinks he can write a fair agreement, you already know, the LLC form will give you an enormous range of flexibility to tailor things to the situation, including the expansion of the group as needed. You also know that entity ownership can provide some tort liability protection for the dereliction of others that might not be available in co-owner situations, depending on how state law treats co-owners (some will by default treat them as partners). Again depending on state law, LLC ownership with the proper operating agreement can also effectively protect the aircraft itself from the creditors of the co-owners if one or more of them end up in independent financial difficulty.

But you know that stuff since

I have great confidence in my ability to create a fair and effective agreement for any group of people to do any activity with any allocation of risks and rewards.

The question is what kind of operating agreement will reflect what your initial group wants to do.[/quote]

 

[midlifeflyer]

I fail to see how a written contract is a bad thing. Situations change, friends have issues, life isn't as simple as a handshake.

If your friend doesn't have the time to invest in signing a contract that will protect you BOTH in the event something goes south, find another friend.

Notice that he thinks that someone who wants someone else to actually live up to what he agreed to is a dick.

 

[EppyGA]

I started in the Warrior as a 50/50 partner. We split the costs 50/50 regardless of who was flying and how much. We later turned it into a 4 way deal and put the plane in an LLC at that point and did a more formal arrangement with fixed monthly costs and per hour costs.

 

[iamtheari]

As a lawyer who thinks he can write a fair agreement, you already know, the LLC form will give you an enormous range of flexibility to tailor things to the situation, including the expansion of the group as needed. You also know that entity ownership can provide some tort liability protection for the dereliction of others that might not be available in co-owner situations, depending on how state law treats co-owners (some will by default treat them as partners). Again depending on state law, LLC ownership with the proper operating agreement can also effectively protect the aircraft itself from the creditors of the co-owners if one or more of them end up in independent financial difficulty.

Hence my question. There are many airplanes that are co-owned by individuals. The average cost of forming an LLC is less than the average cost of an annual inspection. Are there any airplane-specific advantages to joint individual ownership other than robbing Peter the Contract Lawyer to pay Paul the Litigator?

I started in the Warrior as a 50/50 partner. We split the costs 50/50 regardless of who was flying and how much. We later turned it into a 4 way deal and put the plane in an LLC at that point and did a more formal arrangement with fixed monthly costs and per hour costs.

Have you run into any types of costs that you had to adjust your arrangement to more fairly divide?

 

[EppyGA]

Have you run into any types of costs that you had to adjust your arrangement to more fairly divide?

We had an expensive year last year and had to adjust the hourly fee upward to get us back on track. We pay $150 monthly and $43hr dry. Last year it was $17hr.

 

[Mike Smith]

I have nothing to add, but I am considering either this or a flying club with someone now. Just tagging to learn.

 

[Tom-D]

I fail to see how a written contract is a bad thing.

When you have a binding contract making you a full partner, and you partner kills some one with the aircraft you will be sued. for sure.

no paper, no tracks. you just loose your half of the aircraft, not most of your learnings for the rest of your life.

 

[iamtheari]

When you have a binding contract making you a full partner, and you partner kills some one with the aircraft you will be sued. for sure.

no paper, no tracks. you just loose your half of the aircraft, not most of your learnings for the rest of your life.

This is a lot like declining to use condoms because your neighbor's roommate has a cousin who joined the Navy and heard a story about a Marine who was home for leave and had a condom break and, ever since 11 months later when his daughter who looks a lot like his ex-girlfriend's neighbor's kids was born, he has had to pay child support. Lack of paper doesn't mean lack of agreement, it just means lack of evidence of the details of the agreement. It's a lot easier to convince a judge or jury that your unwritten agreement was to ratify each other's careless behavior than it is to convince them that your written agreement prohibiting carelessness was a mere farce.

Meanwhile, back to the original topic for a brief moment, it sounds like people have had success with straight 50/50, straight hours-of-use, and a combination split according to fixed vs. variable costs. Has anyone used some kind of sliding scale method of allocating aircraft costs rather than dividing them by type? Maybe split all costs by the number of hours each owner flies but impose a minimum number of hours (not much, maybe 25/yr per person) to keep it fair those times when the total hours the plane flies are low and to encourage all owners to actually use it? If usage is low it turns into straight 50/50. If usage is high but all one guy, he bears the lion's share of the costs. That way nobody gets to hog the plane and expect others to subsidize it.

 

[midlifeflyer]

Hence my question. There are many airplanes that are co-owned by individuals. The average cost of forming an LLC is less than the average cost of an annual inspection. Are there any airplane-specific advantages to joint individual ownership other than robbing Peter the Contract Lawyer to pay Paul the Litigator?

You mean reasons specific to an aircraft being an asset rather than an apartment building or boat or truck or other titled asset that can also lead to unintended liabilities? There are some FAA issues, mostly related to situations in which the aircraft is being used for business purposes. There can be insurance differences, since the co-owners, rather than a company, are the owners of the policy.

But you are now getting into the type of questions that are the subject of professional advice, both legal and accounting, based on the specifics of the situation, like any transaction.

 

[rbridges]

My major concern comes from the fact that some costs are purely calendar-driven, others are purely hour-driven, and many others are somewhere in between. For example, if you hit a dry spell for a few years where only one guy flies the plane but he doesn't fly it much (say 15 hours a year compared to the other guy's 0), the engine will likely need an overhaul before it reaches TBO, but the guy who was at least making an effort to keep it running might unfairly have to pay 100% of the overhaul cost just because his partner didn't fly at all and their agreement divides maintenance based solely on hours of use.

I have seen planes neglected because the majority of the owners were inactive, so they did not commit to a needed engine overhaul. The result is that the plane just gets neglected more. I don't want that to happen to my investment. Of course, rule #1 in partnerships is knowing and trusting your partner, but I always try to have viable alternatives to best-case scenarios, which drives me to plan for situations where one of us loses his medical or can't afford to fly and the other guy doesn't want to invest 100% of the costs in a 50% investment. So, if anyone has some advice on this topic from their specific experience (including agreement terms that you regretted having, regretted not having, or loved to have), please send it along. Thanks!

I think most agreements are based on putting a "per hour usage" into an account. That way the person who flew the most paid the most. If the plane hits a premature overhaul time, use the savings and split the difference by the number of partners. Even if I didn't fly much, I'd pay my share to keep the plane airworthy. That's the whole reason for a plane's existence, and anyone buying into a plane should think that way IMO.

I guess, worst case scenario, be able to pay for the whole thing yourself and sue the partner. I know it's your friend, but when you're talking tens of thousands of dollars, it's a business, too. A true friend knows that. Personally, get it in writing. Memories fade, things get remembered wrong, etc.

 

[midlifeflyer]

This is a lot like declining to use condoms because your neighbor's roommate has a cousin who joined the Navy and heard a story about a Marine who was home for leave and had a condom break and, ever since 11 months later when his daughter who looks a lot like his ex-girlfriend's neighbor's kids was born, he has had to pay child support. Lack of paper doesn't mean lack of agreement, it just means lack of evidence of the details of the agreement. It's a lot easier to convince a judge or jury that your unwritten agreement was to ratify each other's careless behavior than it is to convince them that your written agreement prohibiting carelessness was a mere farce.

I don't know. Maybe "no tracks" means he's not even on the title and hopes his "friend" is left holding the bag for anything that happens with the airplane. After all, the dick deserves it for asking for an written agreement to begin with!

 

[edo2000]

An interesting thread. After co-owning seven aircraft, I'm still learning a lot from this.

 

[coloradobluesky]

If it were me, the partners would equally share fixed costs of insurance, annual and hangar. Then essentially rent the plane out to the partners without those costs dry. And everyone leaves the plane with some standard amount of fuel in it, say 1/2 fuel. So if there were three partners and the fixed costs were 6000, each partner would pay 2000 plus 60 per hour. This would save each partner 4000 a year over owning the plane individually, the other partners share of the fixed costs. There is another savings. Each partner would have to come up with only 1/3 of the cost of purchase, that would save him say 5% interest on 20,000 or 1000 a year. Looking at it that way it would save each partner 5000 a year on a 60,000 airplane with fixed costs of 6000 and hourly costs of 60 per hour.

It wouldnt be too hard to figure out a way to rent the plane out wet, though that is a bit more complicated IMO.

The best setup is you are all friends and like to fly together and one of you is a CFI and can give biennials and instruction to the others. ....

 

[Merlin Rhoda]

We each own 50% of an LLC which owns the plane. We split fixed costs (maint, upgrades, hangar, insurance, annuals, etc) and charge ourselves an hourly wet fee. Fuel is paid for on a credit card billed to the LLC.

This agreement works well for us. I like that we don't have to worry about leaving exactly X gallons in the plane for the other guy.


Sent from my iPhone using Tapatalk

 

[iamtheari]

I like the company credit card idea for gas on the road. Wet rate makes more sense to me than hassling with how much fuel to leave in the plane.

 

[JCranford]

Our equity club has two airplanes. Costs are split evenly among the members regardless of flight time. I'm even technically paying for a plane I cannot currently fly (insurance requirement of 200 PIC). Fortunately we have a large reserve fund which pays the costs.

 

[bradg33]

I'm in a co-ownership arrangement with 4 others via an LLC. Each of us pays the LLC a fixed monthly amount to cover hangar, insurance, database subscriptions, and basic annual inspection charge. We then each pay $50/hr dry when we use the plane. Maintenance and overhaul reserves are funded from the $50/hr charges. To the extent we have a shortfall, each ponies up their proportionate share (1/5), regardless of how much they've flown the airplane. We also each contribute equally to any upgrades that we vote on. Working well so far.

 

[KuJo]

We each own 50% of an LLC which owns the plane. We split fixed costs (maint, upgrades, hangar, insurance, annuals, etc) and charge ourselves an hourly wet fee. Fuel is paid for on a credit card billed to the LLC.

This agreement works well for us. I like that we don't have to worry about leaving exactly X gallons in the plane for the other guy.


Sent from my iPhone using Tapatalk

I'm very interested how you have the credit card set up. Would you expound on this a little?

 

[MIFlyer]

For those who aren't attorneys, I would strongly echo all of the advice others have offered: Hire one. You can pay a lawyer $1,000 up front to help you form a proper corporate entity or write an agreement for joint individual owners, or you can pay a lawyer $50,000 to litigate through the problems you created by going cheap on the earlier opportunity. The second lawyer gets to have more fun at your much greater expense than the first one, but you should let his other clients provide that entertainment and save yourself the hassle.

Unfortunately, I am an attorney, so that means I will disregard the paragraph I just wrote and try to put this together myself rather than hunting down an aviation lawyer to help with it. (All the other pilot-attorneys I know have also been successful enough to keep the two separate, it seems.) I have great confidence in my ability to create a fair and effective agreement for any group of people to do any activity with any allocation of risks and rewards. It's pretty obvious that the rewards of co-owning an airplane can be allocated readily according to who wants to fly the thing. So I am here mostly looking for ideas of how to fairly allocate the risks (including costs).

But that being said, how about the choice between co-ownership by individuals and corporate ownership of the plane? It seems to me that it would be much more flexible and less paperwork-intensive to have a good LLC operating agreement that allows for incoming/outgoing members than to constantly re-register the airplane with the FAA every time you gain or lose an owner. That's obviously a bigger concern when you have more than 2 owners, but I know of airplanes that started with 2 owners and mushroomed into a half-dozen.

there's a lot to manage, and the agreement should obviously account for the three D's as well as the "what if someone wants out"/etc.

as far as costs, i'm considering partnership vs sole ownership, and the only way i'd personally set it up is to do the following
1. fixed/calendar costs are divided equally. hangar, insurance, gps subscriptions, oil changes (most will do t his on months vs hours) etc. I'd also put random consumable into this and not try to allocate it by time. Washing/waxing supplies, a new $30 space heater when the old one dies, etc. I'd just plan a few hundred bucks for this per year, evenly divided. I personally would put the "average annual" into this as well. most things seem to be things that fail based on time, weather exposure, etc vs hours flown and so if the annuals run $6k/year, i'd rather be in a partnership where our monthly "dues" just include the $250/each in addition to the other fixed costs vs having to have a discussion when the AI craps itself and arguing about how to split a $700/bill. is that an hour wear thing, or was it just old. forget it. just make engine/prop/fuel the variable and split the rest)
2. variable cost of flying (fuel and a TBO reserve fund) based on hours flown. most seem to pay for their own fuel and then pay some $$ per hour into the LLCs reserve fund to cover engine and prop OH
3. upgrades: this is important to align on, and I think this should be split according to ownership share, as it should increase your share value equally. if one partner REALLY wants something more than the other, they could agree to just eat a few extra thousand to make it happen. Ie, if I fly IFR, but my partner has zero interest in it, then maybe we reach a deal where he pays $3k for the upgrade and I pay $7k or something
4. damage/etc. what happens if someone damages the plane (bald a tire or something)? does the LLC just eat it, or does it go against the person who caused it?

 

[brien23]

If you are not friends enough with your partner to do this with a hand shake, don't do it.

When they are a dick enough to require a written contract, they are dick enough to get a lawyer and hold you to it.

Partner on a PA-23 for 15 years only a hand shake, worked out great. I put about 500hr on it and my partner put about 1400 hr on it, used it for flight instruction made money on it at the end after we sold it it cost me almost nothing to fly it. Not saying some partnership deals do not end up the partner from hell but the one I had knowing the other person for years worked for me. First plane worked out great so we bought a Hot air Balloon still have it and that partnership is working well, we just got a offer on the Balloon and we are selling it to a friend who used it with us. Sometimes partnerships work out great, hope you find the same partnership, good luck.

 

[coloradobluesky]

Most attorney's will think that aircraft have titles like cars. Ask him how aircraft are owned, see if he knows. What you need is someone else's contract where they have, over the years, thought of everything and added things as they come up. Still, not going to cover everything. Problems occur when there is a lack of money on partners part to pay his bill.

 

[jaymark6655]

Some good info in here, I am learning a lot. I was thinking of doing a monthly due which includes all fixed cost plus a set amount of flight time (maybe 25 hrs/year/member) to keep cost down. The flight hours would be dry since I could not figure out a good way to deal with cost of fuel and covering fuel cost that might be purchased at a higher price than the home field on cross country trips. I like the half full, since I did not want partners to leave the tank empty but would hate trying to defuel it if it is required full and my next flight requires less than full fuel due to weight. The dry rental cost would cover use based maintenance and a engine/prop reserve. Since I don't have a plane yet, I had considered having an initial buy in to cover plane acquisition or put the loan cost in as part of the dry rate with the discount rate once a member passing the minimum flight time. If a co-owner wants out, he can sell his share if we did the initial buy in. If the plane cost was part usage, it might be nice to figure what part of the plane loan he paid and try to have him sell his seat for that amount or a percentage of it so deciding to leave the ownership wouldn't be a total loss of all that money put towards a plane he did not get to keep. All of this sounds really complicated, so I am in favor of a contract even between friends. Like I told one friend recently, "You're poor, you need a prenup more than some rich guy because you can't afford to pay out half your retirement fund that you have been paying into for 15 years before you got married. Why would you let her have instant access to half that money in a divorce?"

 

[wayne]

Lots of ways to handle it. Funny part is, everyone seems to love the way they do it.

I'm working on one now, similar to many here. Split the capital and fixed costs by the number of owners. Then charge a dry rate for time driven maintenance. I've seen some set it low and just divide up the overage when something breaks and some set it high as they bought a plane with 800 hrs on the engine so they want to build reserves faster. I wouldn't want to build reserves faster. Everyone agreed to buy the plane, so once it needs a rebuild they should get a share of that "lost" 800 hrs; generally that was in the lower price they paid for the plane. If something needs to be done earlier than planned, example the engine needs a rebuild but you only have $10,000 of the $25,000 needed, then the group splits up the remaining $15k evenly. In a spreadsheet model we even have some maintenance costs on the monthly charge. Not sure if we'll leave that in or not.

That doesn't work for everyone. I see lots of different options here. Whatever you do just needs to work for the co-owners of that plane.

I see the LLC more for accidents than anything else. If one of us did something stupid and crashed into a house I'd prefer to make it harder for people to go after the other co-owner(s).

The biggest plus is to have a good relationship with the other owner(s). And similar wants/needs/desires from the plane. It's pain if one wants to upgrade to the latest glass panel/GPS/whatever and the others want it to stay simple. Or the reverse. You need a good match.

 

[Merlin Rhoda]

I'm very interested how you have the credit card set up. Would you expound on this a little?

The LLC applied for and received a credit card account. We issued each member (originally 3, but now 2) a copy of the card. When we buy gas or airplane related supplied we pay with the LLC credit card. When the bill comes we pay it from our LLC checking account. He and I each pay a monthly fee into the account plus a wet hourly rate. This makes accounting simple for us.

Some friends have a rule for their plane that it is refilled after every flight to the tabs and they pay an hourly dry rate. That seems to work for them.

 

[Groundpounder]

Working on putting together a 2 way partnership on an LLC owned airplane right now. Lots of good info in this thread, and we are planning on meeting with an aviation lawyer soon. One thing that was told to me, was that if an LLC has a bank account that is increasing in amount, i.e. we're putting aside $xxx per flight hour for engine overhaul, that the llc can be taxed on that as income. Any truth to that?

 

[Ravioli]

Working on putting together a 2 way partnership on an LLC owned airplane right now. Lots of good info in this thread, and we are planning on meeting with an aviation lawyer soon. One thing that was told to me, was that if an LLC has a bank account that is increasing in amount, i.e. we're putting aside $xxx per flight hour for engine overhaul, that the llc can be taxed on that as income. Any truth to that?

That savings amount is not income. It is a liability that is due to the members. When I was the Treasure of a flying club the reserve funds were kept in a savings account (Balance Sheet Asset) with a matching amount in the reserve account (Balance Sheet Liability). Each month an amount equal to 30% of the flight charge was transferred from checking to savings, and then the reserve funding was dr Income, cr reserves.

The 70% was used for routine maintenance, annuals, oil, etc, There was also a monthly fixed fee to cover Hangars, Insurance, Databases, Scheduling, and the CPA.

This is for a 2 plane, 14 member club. Might be too complicated for your needs.

Any funds that are collected and not used for expenses or reserves would be considered taxable income to the MEMBERS of the LLC so you'll need to report your amounts on your personal income taxes. The club I was in was a Corp so it reported tax independently from the membership. There was never a tax payable while I was involved due to depreciation, loss carryovers, and the like. The pricing was such that if there were to be a profit it would be minimal. Always a way to spend some money when you own planes.

that's what SGOTI thinks about it anyway.
<--- THAT guy

 

[Groundpounder]

That savings amount is not income. It is a liability that is due to the members. When I was the Treasure of a flying club the reserve funds were kept in a savings account (Balance Sheet Asset) with a matching amount in the reserve account (Balance Sheet Liability). Each month an amount equal to 30% of the flight charge was transferred from checking to savings, and then the reserve funding was dr Income, cr reserves.

The 70% was used for routine maintenance, annuals, oil, etc, There was also a monthly fixed fee to cover Hangars, Insurance, Databases, Scheduling, and the CPA.

This is for a 2 plane, 14 member club. Might be too complicated for your needs.

Any funds that are collected and not used for expenses or reserves would be considered taxable income to the MEMBERS of the LLC so you'll need to report your amounts on your personal income taxes. The club I was in was a Corp so it reported tax independently from the membership. There was never a tax payable while I was involved due to depreciation, loss carryovers, and the like. The pricing was such that if there were to be a profit it would be minimal. Always a way to spend some money when you own planes.

that's what SGOTI thinks about it anyway.
<--- THAT guy

That is more complicated than we need it to be, but that answers the question regarding taxes.

Thanks