Aircraft are expensive. But what if you could buy a plane at a 50% discount and only pay for 50% of the ongoing fixed costs?
Buying a plane with someone else is a great way to lower the price tag of private aviation. But doing it correctly can be a challenge.
Over the next three articles, we will walk through the two primary ways for multiple people or businesses to own a plane together: a shared LLC or true co-ownership. We’ll also go through some key points to keep in mind as you consider teaming up with someone on aircraft ownership.
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The (Wrongly) Most Common – Shared LLC
Most clients buying a plane together immediately plan to set up a Limited Liability Company with two or more Members (owners). In reality, this arrangement is optimal only about 10% of the time.
The fundamental principle often overlooked is that, in this scenario, the owners don’t actually own a plane together. They each own part of a business; the business owns the plane. The difference between owning a plane together or a business together can be stark.
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Changing an Owner
A shared LLC can make it more difficult to sellan owner’s share of the plane. Since the “share” is actually ownership of a business, it’s part of the business that’s being sold rather than part of the plane. This means a new owner also assumes the business’s potential liabilities, which may make the purchase less appealing. Any partial sale will involve corporate law and requirements governing the sale of businesses, rather than a more straightforward partial aircraft sale. The corporate sale will require extra layers of protection, corporate due diligence, potential indemnification language, and updates to the Secretary of State in its place of formation and the FAA.Â
On the flip side, a partial sale will not require re-registering the plane with the FAA, since the owning LLC is not changing. This is not really a paperwork benefit, since updated LLC documents will still need to be filed with the FAA. However, this could result in a tax benefit. In situations where sales tax was paid on the plane, keeping the registration undisturbed could avoid the need to pay sales tax again. Some states, however, treat the sale of a single-asset entity as a sale of the asset itself for sales tax purposes, so there could be sales taxes anyway.
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Tax Treatment
Buying a plane in a shared LLC can also create potential federal income tax traps. Some aircraft expenses may become nondeductible, making it more difficult to meet the requirements for bonus depreciation.
However, for mostly personal-use aircraft where neither owner is pursuing tax deductions, this point is moot, and a shared LLC could provide some simplicity. It is imperative to walk through your planned aircraft use with an aviation CPA before you acquire the plane to determine whether a shared LLC will handicap your tax planning.
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Flight Department Company Trap
Perhaps the most overlooked issue with a shared LLC is the “flight department company trap.” The FAA prohibits the owners from using the LLC as their flight department. The LLC cannot operate the plane on behalf of the owners, with each owner reimbursing the LLC for their share of expenses. More on this topic here. This trap can be avoided with proper planning prior to the acquisition.
In sum, a shared LLC can be an effective tool for two or more people to own an aircraft. But the next option, co-ownership (stay tuned for Part 2 next month), should at least be considered before deciding on the ownership structure of any shared aircraft.
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This article is not intended, nor should it be construed or relied upon, as legal advice. The comments, recommendations, and analysis expressed in this article are those of the individual author, John Farrish, and are purely informational. Each aircraft owner’s situation is unique and requires its own thorough discussion and analysis. This article does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, each person should retain and consult an attorney with knowledge of the subject matter.
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