When is a flying club operating as a commercial operation?

saddletramp

saddletramp

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saddletramp
Let's say you start a flying club. To be a member and qualify for the club insurance you have to have equity in the airplane. So 10 guys buy a $100,000 182 & each invests $10,000.
Fine all looks legit to me.

But down the road the club decides to increase their revenue & find people wanting to rent their 182 but are either unable to "buy-in" or chose not to. The club then decides to sell monthly memberships for a few hundred dollars & rents the 182 to the new monthly member.

This smells like a commercial operation to me disguised as a club. I'm I wrong?
 
I think you'll find from an insurance cost perspective, the maximum named-insured pilots they will allow on a non-commercial policy is either 4 or 5, depending on the company. We had a theoretical discussion with our insurance broker about this a few years ago. It isn't so much an issue of ownership stake, but rather the number of named-insured pilots on non-commercial policies. While you could use the open-pilot clause for qualifications, that creates headaches for requiring really good non-owned aircraft insurance. Then there is the question of is instruction allowed to non-owners/non-named pilots. The answer to that is likely "no".

So long as you are following the rules for inspections according to the regulations, you could well have 10 pilots flying the plane as a rental. That doesn't change that it is still Part 91 operations.
 
Yeah, I'm far from an attorney, but doesn't sounds like an FAA problem to me. Don't think they care who rents what plane to whom, as long as it's all just pilots flying part 91. Might be an insurance problem. Honestly, though, it sounds more like a club with more than one tier of membership. I'd expect the higher tier memberships get either preferred scheduling or better rates, to go along with their higher investment. It sounds smart to me. Probably good to make sure all members get check out's in the planes, but that's just common sense.
 
Who is making that decision? As equity owners, everyone should have an equal say and an equal share. If most owners want to start it as a “dues club” to raise money and they’re not sharing it with all the equity investors or buying them out, there is a different problem…using my property for your business without compensation.

If everyone agrees, the it’s just 10 partners renting out their airplane.

is this hypothetical or a real issue?
 
If it's a commercial operation, you need 100 hour inspections. Is that required for pure equity club?
 
saddletramp said:
Let's say you start a flying club. To be a member and qualify for the club insurance you have to have equity in the airplane. So 10 guys buy a $100,000 182 & each invests $10,000.
Fine all looks legit to me.

But down the road the club decides to increase their revenue & find people wanting to rent their 182 but are either unable to "buy-in" or chose not to. The club then decides to sell monthly memberships for a few hundred dollars & rents the 182 to the new monthly member.

This smells like a commercial operation to me disguised as a club. I'm I wrong?
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Smells to me like a an equity club selling nonequity memberships or expanding to include outside rentals.

I'm not sure what you mean by a "commercial operation." They are not selling crew and flights to non pilots so it's not Part 135. If you mean that at some point it looks like a rental FBO, maybe, maybe not

Offhand, it doesn't sound like anything nefarious, but.. Hopefully, the club is getting professional advice. If the club was set up as a 501(c)(7), I'd want to know how the specific of the arrangement can affect that. And I can see potential insurance issues depending on how the policy is written. There might be a practical issue in terms of some non-equity members, who know they can simply stop, not being invested in good care, so that would require some policing. Maybe a 100 hour issue for the checkouts.

Basically, a bunch of questions which need answers,
 
A common method to get around the airports uniform commercial standards. A club in name only.
 
Dana said:
If it's a commercial operation, you need 100 hour inspections. Is that required for pure equity club?
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Depends on the type of commercial operation. If the commercial operation is carrying passengers for hire or providing paid flight instruction, then 100 hour inspections are required.

The general FAA view on equity clubs is that 100 hour inspections are not needed because the trainee is an owner. The trainee is providing the aircraft rather than the instructor. Whether that would apply to a non-equity setup is a good question.
 
Kenny Phillips said:
But charging for flight instruction does.
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True, provided the CFI has a direct connection to the aircraft. But if a monthly member were to rent the aircraft from club then hire a non-member 3rd party CFI the 100 hour would not be required. Regardless, I was replying to the OPs rent statement.
 
saddletramp said:
Let's say you start a flying club. To be a member and qualify for the club insurance you have to have equity in the airplane. So 10 guys buy a $100,000 182 & each invests $10,000.
Fine all looks legit to me.

But down the road the club decides to increase their revenue & find people wanting to rent their 182 but are either unable to "buy-in" or chose not to. The club then decides to sell monthly memberships for a few hundred dollars & rents the 182 to the new monthly member.

This smells like a commercial operation to me disguised as a club. I'm I wrong?
Click to expand...

Maybe, maybe not. A non commercial flying club is not required to be a pure equity arrangement and there are a lot of non-commercial flying clubs where the member may never see a nickel of his initiation fees.
 
Jeff Oslick said:
I think you'll find from an insurance cost perspective, the maximum named-insured pilots they will allow on a non-commercial policy is either 4 or 5, depending on the company. We had a theoretical discussion with our insurance broker about this a few years ago. It isn't so much an issue of ownership stake, but rather the number of named-insured pilots on non-commercial policies. While you could use the open-pilot clause for qualifications, that creates headaches for requiring really good non-owned aircraft insurance. Then there is the question of is instruction allowed to non-owners/non-named pilots. The answer to that is likely "no".

So long as you are following the rules for inspections according to the regulations, you could well have 10 pilots flying the plane as a rental. That doesn't change that it is still Part 91 operations.
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Avemco will issue an owners policy with a club amendment with as many as 18 members per plane with a premium that varies with the number of members at renewal.
 
Bell206 said:
FYI: From a maintenance point, renting aircraft doesn't trigger the 100hr requirement needed with "for hire" ops.
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If the “club” employs instructors or maintains a list of approved instructors and the renters are receiving flight instruction, the aircraft have to have 100 hour inspections.
 
Clip4 said:
If the “club” employs instructors or maintains a list of approved instructors and the renters are receiving flight instruction, the aircraft have to have 100 hour inspections.
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I believe I covered that when I stated "direct connection" in the post above.;)

However, even if the club were to simply recommend a specific CFI for instruction in the clubs aircraft could get into the gray area and trigger the 100 hour requirement. So the CFI doesn't always need to be employed or on a list.
 
In our state, that activity would not be within the scope of a legal flying club. Check your laws.
 
airdale said:
In our state, that activity would not be within the scope of a legal flying club. Check your laws.
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Other than taxes, what does state law have to do with it?
 
I belong to a large non-equity club, which has something like 50 airplanes on line. (I know it's an actual club and not an FBO masquerading as a club because the board of directors is elected by the members.) All the members are considered named insureds. The club's rules prohibit flying the planes for hire. CFIs have to be members of the club in order to instruct in club airplanes.
 
bradg33 said:
Other than taxes, what does state law have to do with it?
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It would be very situation dependent, but if the state didn't consider the club to be a nonprofit, then its federal 501(c)7 or similar nonprofit status would probably also be revoked. So now the accounting must be to federal tax standards with proper capital equipment depreciation for example = $$ to tax preparers. At our airport, the club hangar's ground lease would become a commercial operator lease with attendant requirements including commercial liability insurance. Airplane insurance status would go from club to commercial operator. As someone mentioned, I think 100 hour inspections on the aircraft would be required. The IRS might find that anyone doing paid work for the club was legally an employee rather than an independent contractor, hence a full payroll might be required including payroll taxes and withholding. The facility would become a "workplace" subject to OSHA inspections and standards. In my experience with small nonprofits, the bureaucrats pretty much leave them alone. Not so much for commercial businesses.

Hard to say without specific information on state legal requirements and airport owner/agency requirements. An airport receiving federal funds is required to protect the existing FBOs from unfair competition, like competition from a cheap flight school. That might be the worst case ... no airport at all.
 
airdale said:
Airplane insurance status would go from club to commercial operator. As someone mentioned, I think 100 hour inspections on the aircraft would be required.
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FYI: this would have no bearing on the 100 hour inspection requirement. Maintenance is not predicated on tax, insurance, airport, or any other non-FAA classifications. Its strictly based on operational use of the aircraft.
 
Bell206 said:
FYI: this would have no bearing on the 100 hour inspection requirement. Maintenance is not predicated on tax, insurance, airport, or any other non-FAA classifications. Its strictly based on operational use of the aircraft.
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Sorry, I did not mean to tie the two thoughts. They were separate items on the laundry list.
 
Clip4 said:
Avemco will issue an owners policy with a club amendment with as many as 18 members per plane with a premium that varies with the number of members at renewal.
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The rate is also going to be dependent on the qualifications of the least-experienced pilot. If there are non-IFR, sub ~50 hrs in-type members, my guess is that policy cost is going to look very similar to the cost for a traditional FBO renting the plane.
 
Jeff Oslick said:
The rate is also going to be dependent on the qualifications of the least-experienced pilot. If there are non-IFR, sub ~50 hrs in-type members, my guess is that policy cost is going to look very similar to the cost for a traditional FBO renting the plane.
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Actually are partially correct. 100 total hours is standard and there are specific check out requirements based on hours of complex / make model. 10 hours checkout is there standard for a 100 hour private with no complex time as an example. Recurrent ride with CFI if you have not flown the covered aircraft in previous 180 days. Policy not rated for club pilot experiance.
 
Palmpilot said:
I belong to a large non-equity club, which has something like 50 airplanes on line. (I know it's an actual club and not an FBO masquerading as a club because the board of directors is elected by the members.) All the members are considered named insureds. The club's rules prohibit flying the planes for hire. CFIs have to be members of the club in order to instruct in club airplanes.
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And if that is the case, the aircraft must have 100 hour inspections for flight instruction.


“With respect to instructors who are members of the flying club, the FAA position is that a member instructor providing lessons to other members would not implicate FAR91.409(b) as long as: 1) there is no contractual relationship between the member-instructor and the flying club for the provision of flight instruction services 2) the member- instructor is not recommended or given any preference by the flying club, and 3) the members are free to choose instructors who are not members of the flying club.” Note that all three conditions are required to not implicate FAR91.409(b).”
 
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Clip4 said:
And if that is the case, the aircraft must have 100 hour inspections for flight instruction.
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They do.

“With respect to instructors who are members of the flying club, the FAA position is that a member instructor providing lessons to other members would not implicate FAR91.409(b) as long as: 1) there is no contractual relationship between the member-instructor and the flying club for the provision of flight instruction services 2) the member- instructor is not recommended or given any preference by the flying club, and 3) the members are free to choose instructors who are not members of the flying club.” Note that all three conditions are required to not implicate FAR91.409(b).”
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Thanks for the reference. Do you have a link to that, or the name of the questioner if it's an interpretation letter?
 
saddletramp said:
This smells like a commercial operation to me disguised as a club. I'm I wrong?
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What is the concern?

They can be a club or be a rental company owned by 10 people. There's only a few changes between the two.
 
bflynn said:
What is the concern?

They can be a club or be a rental company owned by 10 people. There's only a few changes between the two.
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I have owned an FBO & currently work for one as a full time CFI. It costs a lot of dollars to run a legitimate FBO, ie maintained aircraft, facilities, proper insurance, full services. If a "club" is cutting corners then it's not a level playing field to those in the FBO business that are running a legal operation.

I guess I'm being selfish. There I said it.
 
saddletramp said:
I have owned an FBO & currently work for one as a full time CFI. It costs a lot of dollars to run a legitimate FBO, ie maintained aircraft, facilities, proper insurance, full services. If a "club" is cutting corners then it's not a level playing field to those in the FBO business that are running a legal operation.

I guess I'm being selfish. There I said it.
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You're concerned that you believe they won't follow the rules related to renting/training or that they have a competitive advantage over you in lower costs (own airplane, no building, etc)?
 
That & I do have some concern about protecting the public. New people to aviation might not understand the personal risk/liability that they might be taking on.
 
saddletramp said:
I have owned an FBO & currently work for one as a full time CFI. It costs a lot of dollars to run a legitimate FBO, ie maintained aircraft, facilities, proper insurance, full services. If a "club" is cutting corners then it's not a level playing field to those in the FBO business that are running a legal operation.

I guess I'm being selfish. There I said it.
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Most on here think FBOs are gold mines that get rich from free parking and free restrooms.
 
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saddletramp said:
But down the road the club decides to increase their revenue & find people wanting to rent their 182 but are either unable to "buy-in" or chose not to. The club then decides to sell monthly memberships for a few hundred dollars & rents the 182 to the new monthly member.
Click to expand...
There is no requirement for all equity members to have equal amounts of equity invested. The original $10k members become 'charter members' and all other members buy a $100 stock share at initiation which they can sell back to the club when they leave. All members are now equity members. Boom, done. At that point your insurance policy will effectively become the limiting factor on how many members they club can carry.
 
saddletramp said:
That & I do have some concern about protecting the public. New people to aviation might not understand the personal risk/liability that they might be taking on.
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The personal risk and liability they might have from flying their airplane instead of yours?

If your fear is competition, up your game, don't try to destroy theirs. You have little control over them unless you demand to speak to their manager.
 
saddletramp said:
This smells like a commercial operation to me disguised as a club. I'm I wrong?
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Did I miss it? Is this a worry of taxes or FAA and the 100hr? Wait for the next edition of the Master Tax Guide then consider a Not For Profit option. If a single hour of instruction is given why not drum up more from the surrounding community pool?
And/Or
As a layman I'd consider a 0.001 fraction to be equity and could be comfortably covered by an initiation fee. Charge the newer minority owners higher rates with a possible yearly disbursement back to the principals:) Or at least super cheap flying.
 
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