LLC Members Do Not Own “The Aircraft”

I frequently speak with folks who are members of a limited liability company (“LLC”) that holds legal title to an aircraft.  During those conversations these individuals, more often than I would like to admit, state that they “own” the aircraft.  They usually go on to argue that they should be able to fly “their” aircraft without any type of agreement or other documentation because they “own” the aircraft.

Unfortunately, these individuals are wrong on both counts.  To understand why, it is important to understand how an LLC is structured.

An LLC is owned by all of its members.  LLC members hold membership interests in the company that are represented by the members’ capital accounts.  An LLC may be governed by its members or managers to handle the day-to-day business of the LLC.

An LLC is treated as a separate “person” in the eyes of the law with an independent existence from its respective members.  Thus, when an LLC owns an aircraft, the LLC’s members do not actually own an interest in the aircraft.  Rather, the aircraft is an asset of the LLC, and the LLC is managed by the members or managers of the LLC, on behalf and in the best interest of the LLC. So, while the LLC members may own the LLC, they do not have a direct interest in the aircraft that is owned by the LLC.  This is an important distinction that is often misunderstood by LLC members.

Although the FAA is not always consistent in its application of the distinction between the LLC aircraft owner and the members of that LLC, when it comes to aircraft ownership it is clear that the FAA does not view the LLC members as the “owners” of an aircraft where the LLC is the registered owner.

This position can result in problems for LLC members when an aircraft is purchased by, and operated from, what is commonly referred to as a “single purpose entity” or “flight-department company.”  In this scenario, the buyer, which may be an individual or a business, purchases an aircraft for personal use or use incidental to a business under FAR Part 91.  Intending to limit personal liability, the LLC member forms a separate LLC whose sole purpose is to own the aircraft.  But then the LLC operates the aircraft for the LLC member under FAR Part 91.

Unfortunately, the FAA will likely view the LLC’s operation of the aircraft on behalf of the LLC member as a commercial operation requiring an air carrier certificate.  Even though the flights are for the member, any operation of the aircraft by the LLC for the benefit of the LLC member without an air carrier certificate, could subject the pilot(s) actually flying the aircraft to an FAA legal enforcement action and subject the LLC that owns and is operating the aircraft to a civil penalty action.  This is clearly something to be avoided.

Similarly, depending upon how this arrangement is structured, the Internal Revenue Service could view the LLC’s operation of the aircraft as a commercial operation requiring the collection and payment of Federal Excise Tax on any flights operated by the LLC on behalf of the member(s).  Alternatively, a legally compliant Part 91 private operation may only require the collection of sales tax.

However, it is possible to be legally compliant with the LLC owning the aircraft.  The aircraft needs to be operated by the member, as an operator, and for that member’s benefit.  Using appropriate agreements, operational control of the aircraft is transferred from the LLC to an LLC member for that member’s use of the aircraft.  With that structure, the member, not the LLC, is the operator of the aircraft.  This satisfies the FAA’s operational control requirements and avoids the FAA and IRS issues if the LLC were to be the operator.

But regardless of the operational structure, the LLC members will still not be the owners of the aircraft.  LLC members desiring to use an LLC for the purchase of an aircraft should keep this in mind when discussing the ownership of the aircraft.

Each situation is unique and must be analyzed to confirm that the ownership and operational arrangements will comply with the regulatory requirements anticipated by the LLC members for operations under FAR Part 91.  As they say, “the devil is in the details.”

If you want to use an LLC to own and hold title to an aircraft, and where the LLC members will not be the owners of the aircraft, work with a knowledgeable aviation attorney to ensure that the transaction is structured appropriately to meet the regulatory requirements applicable to your particular situation.