"Flight Department Company" Trap

[Chilito]

I am familiar with previous threads debating the pros and cons of LLC ownership. My question is simple:

For those who have an aircraft owned and operated solely by their single member LLC (the LLC pays for all expenses, and you're the only one flying it), how do you avoid being classified as a "flight department company" and operating 'illegally'? Is the FAA going after GA on this?

And I'm looking for the average Cherokee or 172 owner on this--not talking about corporate entities operating Citations.

 

[murphey]

I'm sure you've already researched this question. Your best bet is to find an aviation lawyer familiar with this issue (there are a couple here). Rule of thumb - don't open a can of worms.

But just in case:

https://jetlaw.com/wp-content/uploads/The-Flight-Department-Company-Trap.pdf

https://www.sgrlaw.com/client-alerts/1529/
Paragraph 4
I'm not an attorney, but this paragraph is explicit about commercial operations. If you're not engaged in commercial ops (getting paid, leasing the airplane, etc) doesn't seem that you fall under the category of a FDC.

Remember, LLCs don't provide all the protections you might think they do. Pay a lawyer to do it right.

 

[flyingron]

If you never offer transportation to anybody else, it's entirely superfluous. Is this what you are envisioning?

 

[MichiPilot]

The whole illegal charter effort is looking at Part 91 operators holding out services to the public but not doing the leg work to become a Part 135 operator.

For example, company X owns the aircraft and transports its people (Part 91). Then company X says, well maybe we can take these other people and offers the service. Now they are an illegal charter.

The LLC makeup is irrelevant.

 

[mcmanigle]

For those who have an aircraft owned and operated solely by their single member LLC (the LLC pays for all expenses, and you're the only one flying it), how do you avoid being classified as a "flight department company" and operating 'illegally'? Is the FAA going after GA on this?

https://jetlaw.com/wp-content/uploads/The-Flight-Department-Company-Trap.pdf

I'm also not a lawyer, but this seems to be the right answer. In addition to the usual good advice of "ask a lawyer if an LLC in general and the LLC structure you're envisioning in particular is a good idea," the difference between most private pilot plane ownership LLCs and the "flight department company trap" LLCs is operation.

Private pilots who have a plane ownership LLC are usually doing it because there are multiple pilots who share the plane. (You could just as easily do it as a single member, but it wouldn't protect you from much.) The LLC owns the plane, leases it under whatever terms (wet, dry, whatever) to member pilots, and then the pilots themselves are operating the flights. That doesn't protect you from much if you crash into somebody's house -- you were operating the flight and piloting the airplane as a private person. But it does give you a little bit of protection if one of your partners flies into somebody's house -- they can't say "you own the plane with him; why would you let him fly on a day when the weather was this bad?" because you don't own the plane, the LLC does. And it might give you protection if the plane blows up in your hangar and damages someone else's plane, etc.

When the LLC also operates the flights -- usually by hiring the pilots and owning the plane in a "flight department company", but you might also run into this issue as a private person if you tried to hire a * flight instructor through the LLC instead of on your own dime -- then it's suddenly operating flights for compensation, which comes with its own requirements. In that case, the "compensation" can be as little as "you paid the LLC for the gas you burned" or "you paid the LLC for the flight instructor" or whatever.

So I think the most direct answer to your question is that the LLC owning the plane is fine, and common, though doesn't protect you from much if you're the only one involved (may still be a good idea if you envision partners some day, or worry your plane might blow up in the hangar or whatever, but ask a lawyer). The problem arises when that LLC is also "providing" a pilot or operational control in one way or another.

* EDIT: Removed "ferry pilot", as I agree with wilke, the issue is flying with a passenger or cargo for the good of someone other than "the LLC" as an organization. If the plane just needs to get from point A to point B with no passengers/cargo, a ferry pilot is probably fine.

 

[weilke]

I believe the LLC could hire a ferry pilot to ferry the plane. There is no law against a LLC being the operator of a flight for its own benefit.

What you can't do is to have the LLC hire a pilot, pick up your aunt and fly her to Florida. Your aunt could hire the pilot herself and become the operator of the flight, but you can't route things through the llc.

 

[Chilito]

Great responses, thank you very much!

 

[midlifeflyer]

If you are concerned about the issue, get professional advice. But, generally speaking (your situation may be different), a "flight department company" is a Company B formed by Company A to provide transportation services for compensation to Company A. It provides aircraft and pilots. Basically, it is private carriage, which requires a 135 certificate. That is not your run of the mill co-ownership (LLC or otherwise) formed to make aircraft available for the personal use of its pilot/members.

 

[PPC1052]

If you are concerned about the issue, get professional advice. But, generally speaking (your situation may be different), a "flight department company" is a Company B formed by Company A to provide transportation services for compensation to Company A. It provides aircraft and pilots. Basically, it is private carriage, which requires a 135 certificate. That is not your run of the mill co-ownership (LLC or otherwise) formed to make aircraft available for the personal use of its pilot/members.

This is true. I know you know this, but the following is for others who are less familiar: The slippery slope is when a company wants to buy an aircraft to fly their employees around. The first thing they think is they want to form a separate company to own the plane, thinking that they will limit the liability to the main corporation arising from flight operations. So, they create a simple LLC, and dump the aircraft into the the LLC, and don't give any thought to the implications. Ok, great. Now how do we pay for fuel, etc.? I know, will have the LLC charge the main corporation for operating costs. That will give the main corporation a tax deduction for business expenses, and put funds into the LLC to pay for fuel and pilots, hangar, insurance and maintenance. But the problem is the LLC is not flying their own employees-- it's flying the main corporation's employees around, and it's doing so for compensation. "But, there is common ownership," you say. Too bad. The FAA doesn't care. They are separate corporate entities, and those separate corporate forms must be followed and respected.

Of course, the LLC could legally just own the aircraft and dry lease the aircraft to the main corporation. That would avoid the 135 issue. But that gives operational control of the flight to the main corporation, thus defeating the benefit of limiting liability.

I had this issue come up in one of my cases involving a business jet that crashed. I was hoping that Plaintiff's counsel would not spot the issue and raise it, as it would have made things very uncomfortable for us, particularly on some liability issues (no commercial license, or operating certificate), but would have the potential down side of invalidating the insurance coverage, which would have been bad for them, too, as it would have made collecting on any judgment harder for them.

 

[midlifeflyer]

This is true. I know you know this, but the following is for others who are less familiar: The slippery slope is when a company wants to buy an aircraft to fly their employees around.

Yeah, but I think another small piece, implicit in what you say, helps bring it down to the simplest terms, especially in light of the original question.

There's nothing wrong from an FAA perspective with a company having a flight department. Own aircraft, hire pilots, use them to transport their employees and business guests. That's what we think of as Part 91 corporate. As you say, for various reasons - liability, taxation, simple diversification, others - the company decides to put its flight department in a separate entity. The fact that is is a separate company whose sole/primary business is transportation is what takes it out of Part 91 and into Part 135 private carriage.

Typically, that separate entity is 100% owned by the main company. When the issue first came up, hat 100% ownership was pointed to. After all, "it's just us. Not really a separate company." Chief Counsel's response was, "Well, you are the ones who decides to make it a separate company and that has consequences."

 

[PPC1052]

Yeah, but I think another small piece, implicit in what you say, helps bring it down to the simplest terms, especially in light of the original question.

There's nothing wrong from an FAA perspective with a company having a flight department. Own aircraft, hire pilots, use them to transport their employees and business guests. That's what we think of as Part 91 corporate. As you say, for various reasons - liability, taxation, simple diversification, others - the company decides to put its flight department in a separate entity. The fact that is is a separate company whose sole/primary business is transportation is what takes it out of Part 91 and into Part 135 private carriage.

Typically, that separate entity is 100% owned by the main company. When the issue first came up, hat 100% ownership was pointed to. After all, "it's just us. Not really a separate company." Chief Counsel's response was, "Well, you are the ones who decides to make it a separate company and that has consequences."

Yes, exactly. Thanks.