Many businesses use a “sole purpose” limited liability company (LLC) to own and operate a business jet. The reason people still follow this common structure is sound: They want to create a separate business entity with the sole purpose of owning and operating the corporate jet, thus protecting their other assets from liability. However, as the National Business Aviation Association (NBAA) and most aviation attorneys agree, it’s not that simple.
The FAA applies different rules to strictly private air transportation, which is regulated under Part 91 of the Federal Aviation Regulations (FARS), and commercial charter operations, which are regulated under Part 135.
Many businesses intend to own and operate their LLC under Part 91, but these rules are more relaxed and easy to unintentionally violate. Remember, even if you fly the private aircraft that is owned by your LLC, you’re still paying the LLC to cover all of its expenses, including fuel, pilots, hangar fees, and insurance. Therefore, the LLC is actually operating air transportation for compensation, and under FARS, an entity whose only asset is an aircraft that’s deemed to be in the business of providing air transportation service for compensation must follow the stricter rules of Part 135.
When your LLC is operating under Part 91 when it should be under Part 135, you face a host of penalties and may no longer be protected as an LLC:
- Insurance — If an aircraft is for commercial use and is subject to Part 135 regulations, it needs to be explicitly stated in the policy’s purpose-of-use clause. Otherwise, if an accident occurs and the aircraft wasn’t certified for Part 135 activity, your insurance coverage could be void.
- Taxes — The money paid to an LLC to fund aircraft operations is considered by the IRS to be compensation for transportation, making these payments subject to 7.5% federal excise tax (FET). This can come as a shock to unaware aircraft owners who find themselves in an audit.
- FAA fines — Violating Part 135 regulations could result in significant FAA fines that accumulate on a daily basis.
- Legal issues — The whole point of placing your aircraft in an LLC is to protect your business and your assets. But if the FAA determines the LLC is involved in illegal activity by failing to comply with Part 135 regulations, the protections of the LLC may no longer be relevant.
It’s important to note that LLCs can still work with the help of experts who know how to make sure you’re covered legally. To ensure your transition into jet ownership is as smooth as possible, work with a reliable, skilled broker. Whether your aircraft is for private or business use, the brokers at L & L International have the resources to make sure your ownership structure is ideal for your situation.