Airplane Finance

Ok, so I'm continue to examine the feasibility of purchasing a DA-40
(or a like aircraft). I need to move to Santa Monica in September
but I have a side consulting business (in addition to a salaried job
that allows me to live comfortably) that pulls in say, 100k of
revenue/year, that I want to maintain, for which I need to visit
clients in San Diego 3 days a week. My plan essentially is to, to
the extent possible, redirect the money from the consulting
activities to the aircraft so I can beat the LA traffic nightmare,
and when the contract is over, in three years, sell the aircraft and
recoup a reasonable fraction of the money.

I understand Philip's advice about not flying when you don't have
to. I have a lot of flexibility in terms of arrival time, reasonably
good weather and can take the train as a backup scenario.

Can anyone outline a purchasing and tax structure for the single
person business and aircraft to that would be efficient? Do I have
one LLC own the aircraft, and then rent it to the other LLC?

Thanks in advance,

R

-- Ralph Nelson, April 1, 2009

Answers

If one entity is the main user of the aircraft for business purposes, it is simplest to have that entity own the aircraft. If your business were a Schedule C personal business, for example, you'd own the airplane personally.

If you want to resell the aircraft after three years, I would recommend buying a plane that is already at least three or four years old.

-- Philip Greenspun, April 2, 2009

Regarding the Part 135 issues below... It is true that if a Fortune 500 company, call it GreedCo, puts its flight department into a separate LLC, call it GreedFlight LLC, and then charters the plane back with pilots, the FAA sees an air carrier. The good thing about this structure is that liability for pilot mistakes or airplane maintenance problems is not as likely to come home to roost at GreedCo. The bad thing is that GreedFlight is selling charters to GreedCo and should have a 135 certificate.

You aren't talking about hiring professional pilots, however. Should you set things up in a festival of interacting LLCs, the net result will ultimately be more like what happens when you rent a plane from a flight school or "dry lease" a plane from an owner. You are pilot in command. You have operational control over where, when, and whether the flight goes. In this case the entity from which you got the plane need not have a 135 certificate.

All of that said, shuffling things around in LLCs won't shield you from liability if you make a mistake as the pilot, so you might as well keep it simple and have the business that uses the plane own the plane.

-- Philip Greenspun, April 4, 2009

If your plane is held by a company whose only asset is the plane, the plane, the company and the operator (you) are subject to Part 135 regulations, which means the plane and company and operator are treated as a commercial air carrier. You would be well advised to consult an aviation lawyer regarding the ramifications of this status before going this route.

-- nicholas budd, April 2, 2009

91.501(b)(5) refers to a subsidiary set up to exclusively serve a Part 91 parent company. In that case the subsidiary would need to abide by Part 135.

I'm open to education here, but I believe that if one business entity owns the aircraft under their name, then they would not be in violation of 91.501 and its chewy nougat center.

-- Jason Hackney, April 2, 2009

Ralph, I believe Nicholas is in error in this case, at least in the sense that you make no mention of carrying your clients for hire or for any other kind of compensation. Part 135 requirements will not apply to your operation, whether you form an LLC (or have partners) or not. Whence you "redirect" the money to pay for the airplane is your business, as long as you're not charging folks for rides.

FAR91.501(b)Operations that may be conducted under the rules in this subpart instead of those in parts ...135, ... when common carriage is not involved, include-- (4)"...flights conducted by the operator of an airplane for his personal transportation, or the transportation of his guests when no charge, assessment, or fee is made for the transportation;"

-- Jane Carpenter, April 2, 2009

It is commonly assumed that the regulations do not apply to aircraft which are not used for business purposes, but this assumption is both correct and incorrect. It is correct in that enforcement action is unlikely to be taken; it is incorrect in that in the event of an accident where a passenger or other third person or insurance company suffers a loss or a claim is made, and it is discovered that such an aircraft was not maintained or was operated in accordance with the strict requirement of Part 135, you are in great jeopardy. Companies with fleet aircraft (or indeed only one plane) used for strictly internal purposes rarely place the plane in special purpose companies unless they are prepared to abide by the requirements of Part 135. Again, people are well advised to check this out with an aviation lawyer before proceeding down this (admittedly commonly traveled) route.

-- nicholas budd, April 3, 2009

Ralph, your intentions as you describe them (using an airplane to commute to work) are strictly and indisputably governed by Part 91. Unless you unfortunately blunder on some rule of Part 91, the threat of enforcement action from the FAA is not relevant. Getting crosswise with an insurance company, or a jury in civil court, after an accident is quite another thing. In that unhappy event, as Philip says, LLC's are unlikely to extend much protection anyway.

However, I believe your original question had more to do with tax liability than insurance, civil or criminal liability. If so, you would be well advised to consult a CPA with aviation experience. Speaking from personal observation, some "aviation lawyers" are in the business of scaring their clients into thinking they 'might be' in violation of the FAR's and thus 'might be' in need of pursuing enormously expensive Part 135 Certificates.

-- Jane Carpenter, April 5, 2009

Operating aircraft as part of a holding company is very common among large companies, and these operations are almost exclusively flown under Part 91. The FAA generally sees an arrangement between an independent flight operation and its parent corporation as being private carriage, and thus does not require a Part 135 certificate. In fact, most of these operators face substantially more restrictions form their insurance providers than the FAA.

That said, it is always worth speaking with your local flight standards district office (FSDO) to verify that your operation can be conducted under part 91. Minor differences between operations can make a big difference in regulatory requirements.

-- David Wainland, January 11, 2010