Setting up a flight training business: LLC or INC?

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ArnoldPalmer

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ArnoldPalmer
Thinking a bit ahead, as I look to wrap up the Commercial/CFI ratings within the next six months or so. An airline job is certainly out of the question.

Looking to freelance as an instructor and possibly buy a bird down the road to do some instruction and scenic flights. Of course I am unsure where to begin, but I am sure someone else here has been down this road.

Do I setup the business as a LLC or do I go the route of an Inc.? What are the pros and cons of each?

Currently in Minnesota - but a move to a different state is not completely out of the question. How would that impact the setup?

Bird in question might be a 152/172 or similar.

Thanks!
 
LLC vs. Inc. is all about what tax situation you want to be in. From an asset protection standpoint, they do (and don't do, if you do things wrong) the same thing.

(this is not legal advice)
 
ArnoldPalmer said:
Do I setup the business as a LLC or do I go the route of an Inc.? What are the pros and cons of each?
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In general, which direction to take is subjective to your specific and personal requirements. The place to start is with a local accountant and attorney. Each type entity has different tax and liability issues among other requirements. And since most company registrations are done at the state level, it's important to determine where you want to offer your services. I went the LLC path for mx services as it gave me the best tax flexibility for my situation.
 
Thanks.

What if I decide to take on a business partner down the road?
 
Flight training in MN....I would move south to be able to do it more than 6-8 months of the year. Unless this is more of a part time gig.
Pick a state and consult accountant and attorney for how to set things up. Realize if someone crashes/dies you will be sued no matter the legal entity. If you have spouse i would put everything in her name only. No assets, nothing to collect.

Couple years ago a company started up flight school and renting. a year or 2 in a student leaves to do air work ith 1/2 or less tanks, then several TnG's. On last climb out engine quits due to no gas....company didnt last long after that...shame to I just got checked out on a coupe of their AC.
 
ChemGuy said:
If you have spouse i would put everything in her name only. No assets, nothing to collect.
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'Scuze me?
In my universe, spouses can have assets.

When I did some flight training last year, the family plane was already in an LLC so we left it there. The student rented from the LLC, and the LLC paid for things like the outrageously expensive insurance that we had to buy. When tax time comes around, the earnings of the LLC are just lumped in together with our individual earnings pretty much without distinction, at least this is my primitive understanding. I can't really speak to the pros or cons or legalities of any of these structures. I can tell you that because of the insurance, we did not break even. We only did it because I love flight instruction.
 
kath said:
'Scuze me?
In my universe, spouses can have assets.

When I did some flight training last year, the family plane was already in an LLC so we left it there. The student rented from the LLC, and the LLC paid for things like the outrageously expensive insurance that we had to buy. When tax time comes around, the earnings of the LLC are just lumped in together with our individual earnings pretty much without distinction, at least this is my primitive understanding. I can't really speak to the pros or cons or legalities of any of these structures. I can tell you that because of the insurance, we did not break even. We only did it because I love flight instruction.
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Maybe that should be "spouse." Like a long term gf/bf who you trust, and live in a state where common law doesn't apply?
 
Does not matter aviation wise.

You should ask your CPA which works better for taxes.
 
kath said:
'Scuze me?
In my universe, spouses can have assets.

When I did some flight training last year, the family plane was already in an LLC so we left it there. The student rented from the LLC, and the LLC paid for things like the outrageously expensive insurance that we had to buy. When tax time comes around, the earnings of the LLC are just lumped in together with our individual earnings pretty much without distinction, at least this is my primitive understanding. I can't really speak to the pros or cons or legalities of any of these structures. I can tell you that because of the insurance, we did not break even. We only did it because I love flight instruction.
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Where did I say they couldnt?

In a high risk high exposure business like flight instruction, especially if you provide the plane, if a bad accident happens the owner, instructor, etc WILL BE SUED. Regardless of the LLC, INC, etc.

So if you are a person/couple with assets and you want to start a flight business it would be a good idea to shield those assets. one common way is the Husband (or wife if she is the instructor) doesnt have his (her) name on anything of value...houses, cars, accounts etc. Or depending on state maybe put that in a trust. That way when some idiot crashes and kills himself you dont loose all your assests.

This is common in some industries...Ive had the fun of chasing down contractors that owed us money and only owned a truck and trailer.
 
For tax purposes, an S-Corp or LLC. The are both pass through entities. Unless you are going to have more than 499 share holders, you do not want a corporation.
 
ChemGuy said:
Where did I say they couldnt?

In a high risk high exposure business like flight instruction, especially if you provide the plane, if a bad accident happens the owner, instructor, etc WILL BE SUED. Regardless of the LLC, INC, etc.

So if you are a person/couple with assets and you want to start a flight business it would be a good idea to shield those assets. one common way is the Husband (or wife if she is the instructor) doesnt have his (her) name on anything of value...houses, cars, accounts etc. Or depending on state maybe put that in a trust. That way when some idiot crashes and kills himself you dont loose all your assests.

This is common in some industries...Ive had the fun of chasing down contractors that owed us money and only owned a truck and trailer.
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But some states that wont protect you. Once married everything that is the spouses is also yours and can be lost in a lawsuit.
 
Spend the money to get advice from pros! Go to an accountant and a lawyer licensed in your state because every state does their own thing when it comes to liability etc. The cheap on line one size fits some solution is a good recipe for loosing every thing you own.
 
Something to consider. You might put your assets into an irrevocable trust. It's kind of like a corporation only in the fact that it is it's own entity.

It is worth every penny you will pay a good attorney to structure your business correctly. I cannot emphasize this enough!



Sent from my Pixel 2 XL using Tapatalk
 
ChemGuy said:
Flight training in MN....I would move south to be able to do it more than 6-8 months of the year. Unless this is more of a part time gig.
Pick a state and consult accountant and attorney for how to set things up. Realize if someone crashes/dies you will be sued no matter the legal entity. If you have spouse i would put everything in her name only. No assets, nothing to collect.

Couple years ago a company started up flight school and renting. a year or 2 in a student leaves to do air work ith 1/2 or less tanks, then several TnG's. On last climb out engine quits due to no gas....company didnt last long after that...shame to I just got checked out on a coupe of their AC.
Click to expand...

Um... flight training in MN and ND happen all year, more training in winter actually, contrary to popular belief.
 
mwagg737 said:
Something to consider. You might put your assets into an irrevocable trust. It's kind of like a corporation only in the fact that it is it's own entity.

It is worth every penny you will pay a good attorney to structure your business correctly. I cannot emphasize this enough!



Sent from my Pixel 2 XL using Tapatalk
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Tell us how that works. The grantor (you) cannot be the beneficiary and have no access to the assets. I suppose one could make their wife the beneficiary, but if she divorces you, the trust is not community property.
 
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ArnoldPalmer said:
What are the pros and cons of each?
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FWIW: Asset protection varies by state. For example, when I set up my LLCs it was recommended the "best" asset protection was to maintain a hard separation between me and my company plus sufficient insurance coverage. Another thing to consider is your state's laws concerning asset seizure for judgement. Fortunately my state protects your primary domicile and certain retirement accounts from seizure as do several others. This can be a final resort as in some instances the liability protections of a LLC or INC are not applicable especially in cases of personal negligence of the company owners.
 
James331 said:
Does not matter aviation wise.

You should ask your CPA which works better for taxes.
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:yeahthat:

(disclaimer below)
If liability protection matters to you, you really do want to ask an attorney to make sure things are done correctly in your state. Make sure it will actually help you in your situation, though: LLCs and other limited liability entities are almost always much better at protecting the members of that entity from each other than they are at protecting each member from the company (or vice versa). If you're going to add partners down the line, some kind of limited liability entity is a no-brainer. If not, you may get a better return on your money with extra liability insurance rather than a lawyer and a shiny new entity.
 
Clip4 said:
For tax purposes, an S-Corp or LLC. The are both pass through entities. Unless you are going to have more than 499 share holders, you do not want a corporation.
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An LLC is not necessarily a pass through. With an LLC, you elect how you want to be taxed. A single member LLC can be taxed as a C Corp, S Corp or Sole Proprietorship. A multi-member LLC can be taxed as a C Corp, S Corp, or Partnership.
 
Have this conversation with your accountant:

"I am starting a business and plan to generate tens of thousands of dollars in annual losses plus potentially infinite liability. Please advise me on the best corporate structure."

We went with a C corp, which I preferred as an "arms-length" entity I could (and did ultimately) sell.
 
Well am getting closer.

Anyone have recommendation on a good Aviation attorney in State of MN?
 
An LLC is an "inc." S corps are not used so much any more due to some ownership restrictions. In theory S corp, LLC, C corp, B corp all shield owners from personal liability. The cruel fact is that if someone sues they will sue the entity and the owners, then it is up to the owners to hire lawyers to protect themselves. Good business insurance will defend both the owners and the entity. My company and I got sued once, we made it go away, but in the process the insurance company hired a lawyer for the corp. and another one for me. And paid all the bills. That last bit is the important one. A $$ lawyer is required even if theoretically you are shielded by the corporation.

Do not overthink this. As a small business mentor I frequently see people all concerned about what I call "plumbing and wiring" but who have never talked to a potential customer and have never seen a dime of revenue. Geting some customers and some revenue should be the priority. Everything else can be sorted in due time. Another cushion is that if you have no net assets and your entity has no net assets, nobody is going to bother to sue you. The first thing the attorneys do is called a "wallet check" where the assess assets and determine insurance limits.
 
ArnoldPalmer said:
recommendation on a good Aviation attorney in State of MN?
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Don't have any personal experience with him, but have seen his work and heard good things for Greg Reigel. Don't know if he's still in MN as I see his name associated elsewhere but worth a contact. And don't forget a good CPA to go with your attorney selection.;)
 
Let's back up a bit. Legal configuration of you business is a good question - among many more questions you need to answer first.

First, a wise person taught me that you never start a business without a game plane on how to sell it / harvest it. If you don't, then you're not building an asset, you're just doing a lot of hard work for an income you could have gotten by working for someone else for a lot less work.

With that in mind, suggest you do a lot more homework. Ask as many flight school owners as many questions as you can. Maybe work at a few to learn how the business works.

Then write down your plan with as much detail as possible.

And avoid partners. Usually doesn't work out.
 
In addition to a lawyer expert in your state laws, contact the Small Business Assoc for help with business plan, marketing, etc.
 
airdale said:
An LLC is an "inc." S corps are not used so much any more due to some ownership restrictions
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No. An LLC is not an "inc." An Inc is a corporation. S corp and C corp aren't types of legal entities but rather tax elections for such (and can be applied to an LLC even though it isn't a corporation).
A single-member LLC is a "disregarded entity" taxwise. It's handled the same as a sole proprietorship. LLCs can also be treated as C corps, S corps, or partnerships depending on the situation.

In theory S corp, LLC, C corp, B corp all shield owners from personal liability.
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What on earth is a B corp? A corporation or LLC shelds the owners from liability for the COMPANY'S actions (perhaps), but it doesn't provide protection against their OWN actions.
 
WDD said:
Let's back up a bit. Legal configuration of you business is a good question - among many more questions you need to answer first.

First, a wise person taught me that you never start a business without a game plane on how to sell it / harvest it. If you don't, then you're not building an asset, you're just doing a lot of hard work for an income you could have gotten by working for someone else for a lot less work.

With that in mind, suggest you do a lot more homework. Ask as many flight school owners as many questions as you can. Maybe work at a few to learn how the business works.

Then write down your plan with as much detail as possible.

And avoid partners. Usually doesn't work out.
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Thanks. My first goal is to get to my CFI ;) Should be done here soon.

Next step is to do some instruction locally and see how things go. If everything goes well, I would potentially think about buying a plane to do some instruction. I do have a full-time job, so not sure how things will turn out. However, I'd still like to setup a business to cover myself for tax and liability reasons....
 
ArnoldPalmer said:
Thanks. My first goal is to get to my CFI ;) Should be done here soon.

Next step is to do some instruction locally and see how things go. If everything goes well, I would potentially think about buying a plane to do some instruction. I do have a full-time job, so not sure how things will turn out. However, I'd still like to setup a business to cover myself for tax and liability reasons....
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Do I understand right that:

You own the plane
You will operate the plane and make decisions about its maintenance
You will instruct in the plane

the corp or LLC do nothing for your liability arising from those actions. I'm completely in favor of the C-corp by the way, but you should know that it's not the shield. Insurance is the shield. The corp is for organization and allows you to go get unsecured terms from certain vendors without personal guarantee, and maybe allows you to sell, take a partner, or grow yuuuge without more paperwork (the aforementioned shares swap)

The $1MM commercial/flight school insurance policy you get, which will cost you around 7 grand a year or more, will offer anyone attempting to sue you this choice: Take a million dollars and GTFO, or we will give the million dollars to lawyers instead who will fight you in court.

Our plaintiffs who had credible claims (injury or death) took the million. In 7 years I think we were the target of nearly 30 suits, and 2 of them got a million from us. In all cases, including the other 28 with nonsense claims, insurance paid for our defense and basically "adiosed" them from our concern.

We had one plaintiff hire some sort of PI to call our flight school and sniff around for assets. Luckily my staff transferred the call to me "the general manager", and I was able to send a rich and ear-filling guffaw to him over the wire, and educate him about flight school riches and hoarded gold one might find there.

$0.02. Have fun with it. If you don't sink into total financial ruin too quickly, it's a blast. Like riding one of those mechanical bulls. :D

- Mike
 
WTH is a Commercial/CFI rating??
 
Kritchlow said:
Still not correct. Neither are ratings.
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...then substitute "awesome aviationy privilege made possible by a checkride and getting a cool green thing in the mail" for "rating". Then we should be all good. :)
 
flyingron said:
No. An LLC is not an "inc." An Inc is a corporation.
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Gee, I always thought that "LLC" stood for "Limited Liability Corporation." The fact that different tax rules apply to these various entities does not change their corporate nature.

flyingron said:
What on earth is a B corp? ...
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Public benefit corporation; a relatively new thing.
 
airdale said:
Gee, I always thought that "LLC" stood for "Limited Liability Corporation."
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No, as Bell points out, it stands for COMPANY. LLCs are not Corporations.
The fact that different tax rules apply to these various entities does not change their corporate nature.
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That was my point. S Corp and C Corp are tax elections (well S Corp is, C corp is the absence of an S Corp election). THey are not types of entities. There are Corporations, There are LLCs. There are partnerships. There are trusts. There are sole proprietorships.
Public benefit corporation; a relatively new thing.
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First off, there's no legal entity or designation as a B Corp. A "public benefit corporation" is a distinct entity from a B Corp. A public benefit corporation is still a corporation.
B Corp is a certification by a private entity that has no legal meaning. Someone who is awarded B Corp certification will still be some sort of legal entity (typically, but not limited to a corporation).
 
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