Incorporation for Aircraft Owners

Incorporation for Aircraft Owners

Table of Contents

Importance to Members

Overview

Technical Information

Additional Resources

From the AOPA Archives

Table of Contents

Importance to Members

As pilots and aircraft owners we are always in search of the safest, and most cost effective way to operate our aircraft. Often there is discussion about incorporation and its possible benefits..This subject report will explain in detail the characteristics of corporations, and why incorporating may not necessarily be the most advantageous aircraft ownership arrangement for you.

Please call AOPA’s Pilot Information Center with questions – 800-USA-AOPA (872-2672) Monday through Friday, 8:30 to 6:00 ET.

Overview

The question is frequently asked whether an aircraft owner, or group of owners, should hold title to the aircraft through a corporation as a means of limiting liability for personal injury or property damage, or for income or other tax reasons. For the reasons below, incorporation is usually  not recommended for sole proprietors and is usually not the best form of co-ownership for partners. It is essential that aircraft owners have a sufficiently large limit of liability coverage in their insurance policies so that the insurance company will have a substantial incentive to defend the pilot and other operations of the aircraft.

Technical Information

A corporation is a legal entity, chartered under state law, that is separate and distinct from its shareholders and officers and that has the unique quality of unlimited life. It is a vehicle designed to foster investment by insulating the investors from the liabilities of the business. Indeed, limited liability is the principal reason most businesses incorporate.

Liability in Aviation

As a general matter, though, liability in aviation is imposed on the operator, not the owner, of an aircraft. Accordingly, if you are the pilot in command or perform other acts that indicate that the aircraft is operated or maintained under your direction and control, you will be liable for any injuries or death that results. You cannot limit your liability for such matters by incorporation. Thus, an individual owner will derive extremely little protection from incorporation, and a co-owner may derive some protection against the acts of his co-owners (for which he is usually not going to be liable anyway).

Individuals who operate any title-holding corporation are virtually certain to be sued personally in any case in which the corporation is sued and should be prepared to front defense costs in the event that the corporation lacks the resources to do so. There are, as noted below, various "veil-piercing" theories that will no doubt be asserted against any individual or group of owners. While most small businesses incorporate for the express purpose of achieving limited liability, there are certain circumstances under which the officers and, occasionally, stockholders, can nevertheless be liable for a corporation's debts. These include circumstances when the corporation's creditors are allowed under common law to "pierce the corporate veil" (i.e., to pursue corporate officers personally who have used the corporation as a front for perpetrating a wrong, or who have used it as an incorporated pocketbook or alter ego), or to sue the principal stockholders directly for unpaid wages and employee benefits (as in New York and Connecticut). Accordingly, in attempting to achieve limited liability, it is important not only that the corporation exist and be in good standing (i.e., have paid all of its franchise taxes), but also that it be  operated in a manner which indicates that it is truly separate from its stockholders' personal finances. This final requirement cannot be emphasized enough: unless the corporation is truly  separate from its stockholders, the corporation may be legally ignored by creditors and the courts.

Cost

The costs of incorporating are nominal — a few hundred dollars at most, plus the cost of qualifying as a foreign corporation in each state in which the corporation does business (another few hundred dollars). The annual fees of maintaining the corporation include franchise taxes, registered agent's fees and license fees. A corporation, which is a taxpayer distinct from its stockholders, must also file separate tax returns at both the state and federal levels. These filings may require the services of an accountant, adding an additional cost element. Contrary to popular belief, there are generally no tax advantages to incorporating over operating as a proprietorship or partnership.

A Warning

If you have seen ads for "incorporate your plane in Delaware" and believe that you may thereby avoid any income or sales taxes, you have been misled. While it may be possible to avoid paying the sales or compensating use taxes imposed by the state where your plane is hangared by falsely claiming that the plane resides elsewhere, you can only achieve this benefit by committing a fraud and thereby incurring possible substantial penalties, including criminal prosecution.

In general, an aircraft holding corporation should be incorporated in the state where it has its principal place of business,  not Delaware (unless that is where it keeps its plane) or some other widely advertised locale. The reason for this is that a Delaware corporation will be required to qualify as a foreign corporation (which requires an initial filing fee) and thereafter to pay annual license or fees and state income taxes in the states where it is actually doing business, thus subjecting it to effective double franchise taxation in most cases. While there can be good reasons for choosing a particular corporate domicile, in general those reasons do not apply to small businesses contemplating any place other than their home state as the jurisdiction of incorporation.

Limited Liability Company (LLC)

Many people are aware of a relatively new kind of entity called a limited liability company, or LLC, that has been permitted to be formed in most states. An LLC has most of the limited-liability aspects of a corporation, but is generally taxed as a partnership. Most small business corporations will also be eligible to be taxed as partnerships by making an election to be taxed as an "S corporation" under the Internal Revenue Code. A businessperson contemplating formation of either a corporation or an LLC should consult with an attorney  prior to incorporating. While formation of the entity (using an on-line service or otherwise) is extremely easy, as noted above, achieving the limitation-of-liability and tax effects desired depends on many complex factors which are beyond the scope of this FAQ and not capable of being assured by a mass-market incorporation service.

In Closing

As noted above, incorporation may be of questionable value for owners who are unable to create liabilities for which the corporation alone will be responsible. Such owners may derive optimum benefit from continuing to operate as sole proprietors or partnerships — and purchasing lots of insurance.

Aircraft owners who are looking to save money should consider co-ownership. The AOPA has a very detailed subject report covering the benefits, and technical details of a multiple ownership.

Additional Resources

The Key to Ownership: Realize the Dream
Become an aircraft owner – one way or another
AOPA Pilot, September 2008

Pilot Counsel: Fractional Aircraft Ownership, Part 1
AOPA Pilot, September 2001

Pilot Counsel: Fractional Aircraft Ownership, Part 2
AOPA Pilot, October 2001

From the AOPA Archives

A Piece of the Action
Logging time with owner-pilot shared partnerships
AOPA Pilot, November 2002

Aircraft Ownership Options
AOPA Pilot, October 1998

Choices for Aircraft Ownership
Partnership, corporation, limited liability company or sole proprietorship?
AOPA Flight Training, May 1998

Flying With The IRS
Tax Deductions For Aircraft Owners
AOPA Flight Training, April 1998

Sharing Your Aircraft
Partnerships And Other Ownership Options
AOPA Flight Training, February 1997

Incorporation: The Company Line
All the Business on Incorporation
AOPA Pilot, March 1996