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Structure Your Club4. Structure Your Club

Once you’ve established the founding members and written your mission statement, it’s time to start getting into details. You’ll need to decide if you want to buy or lease a plane, what type of structure you want to establish, and whether or not you want to apply for tax-exempt status either now, or in the future. Let’s look at each one of these decisions individually.

Equity vs. Non-Equity

If you and your fellow club members buy an airplane, and share equally in its costs, then you have an equity club. If you can find someone who will lease an airplane to the club, then you have a non-equity club. Pretty simple, right? Yes, but as with everything in life, there are upsides and downsides to each.

Upside to Equity Clubs: You own the asset. No one can take it away. It’s yours to do with as you please (consistent with the FARs and good operating practices, of course). By the way, even if you are financing the purchase of the club aircraft, you’ll still have an equity club.

Downside to Equity Clubs: You’ll have to figure out how to handle members as they come and go. For example, who’s responsible for selling the departing member’s share, and how do you value that share?

At the Chandelle Flying Club in Austin, Texas, members are responsible for selling their membership at whatever price negotiated between buyer and seller. The board must approve the transfer and the new member.

At the Aero Club of Houston, members’ buy-in is considered a "deposit" and returned to the departing member when he/she leaves.

At the Westminster Aerobats Flying Club in Maryland, the club has first refusal to buy back a membership.  If the club doesn’t exercise that option, and there is a waiting list, the leaving member sells the membership to the next person on the list.  If there is not a waiting list, and the leaving member cannot find a buyer, the member may relinquish the membership back to the club, in exchange for no further payment and ownership obligations.

Upside to Non-Equity Clubs: It may be easier to find an airplane to lease, which means your startup costs may be lower, so you may be able to charge a lower buy-in (initiation fee) and get operational that much quicker.

Downside to Non-Equity Clubs: You are subject to the whims of the airplane owner. If, for any reason, the owner decides to terminate the lease, or just not renew it, you may be left without an airplane. But many leases are negotiated to be at least one year in duration, and you should anyway include a clear termination clause in the lease agreement, that includes a reasonable period of notice.

Maintenance is another potential issue depending on how the lease is structured. It’s important to carefully negotiate who will be responsible for scheduling and paying for maintenance, and to make sure it is clear in a formal lease agreement document.

The Bay Area Aero Club is an example of a non-equity club. The club has a very low buy-in (initiation fee), and low fixed monthly dues. This club has several airplanes that are leased and more than 100 members.

The Westminster Aerobats Flying Club is another non-equity club that leases an aircraft from one of its members.  The club’s buy-in is $1,000 that covers initial expenses and accrues a working reserve, and the dues are $100 per month.

Although we’ll discuss pre-buy inspections in more detail later, they are not only for when you purchase a club aircraft.  Lease agreements should contain detailed clauses on the sharing of maintenance responsibilities between the lessor (owner) and lessee (the club), so a pre-buy inspection is equally important for both equity and non-equity clubs.

Legal Entities

Generally speaking, there are three options to consider for the legal status of your club.  AOPA recommends incorporation rather than a limited liability company or unincorporated  association. As with equity vs. non-equity clubs, there are upsides and downsides of each. Liability protection is an important consideration for your club, so consider this to be a worthwhile startup cost. 
AOPA also highly recommends that you use an aviation-savvy attorney to work with as you make this important decision.  If you need help finding a lawyer in your area, send an email to the Flying Club team at [email protected].

The Unincorporated Association (Co-Ownership)

This option is simple but carries significant risk.  Let’s say you and some friends decide to buy an airplane. Maybe you decide to just split the costs equally among yourselves. You don’t want to deal with opening a bank account or getting a credit card, and you’ve decided to list yourselves as “co-owners” on the FAA registration form.  In its most basic form, this is an  unincorporated association.  Most so-called partnerships are of this type, but we recommend that you call yourselves “co-owners,” as the term “partnership” usually applies to for-profit organizations.

Upside to the Unincorporated Association:

  • Quick and easy—you can be up and running immediately.  
  • There are no forms to file, and you decide on how to oversee the relationship.

Downside to the Unincorporated Association:

  • You have no legal protection against lawsuits should one of your fellow co-owners do something that causes property damage or personal injury.

The LLC

LLC stands for limited liability company and, as the name suggests, provides liability protection, but it may come with considerable personal tax implications.  In broad terms, some LLCs offer the liability protection of a corporation, with the organizational flexibility of co-ownership.  An attorney can set this up for you or, in many states, you can do it yourself. There are many sources online to help should you chose the DIY route. Remember, you’ll need to file tax returns with your state and with the IRS at the end of the year, and you’ll need to maintain the standing of the LLC, which usually involves the annual filing of a form, and of course a fee!

Upside to the LLC:

  • Relatively quick and inexpensive to set up.
  • Not much in the way of corporate record-keeping or the formal need for corporate officers, governance, etc., but a well-run club would do that anyway.
  • The LLC itself is generally not taxed, but read on…

Downside to the LLC:

  • Any profit (income less expenses) made by the club must be shown on the individual member's tax returns, as LLCs involve “pass-through” taxation. For example, if a 10-member club makes a $5,000 profit, each member will file form K-1, showing an income equal to one-tenth of the $5,000, that is, $500. You’ll include this on your form 1040 Schedule-C and will be taxed at whatever bracket you fall under in that tax year. Similarly, if the club has a loss, you may be able to take a deduction on your personal taxes.
  • Although the LLC is not taxed, a multi-member club will still have to complete IRS Form 1065.
  • It is unlikely the IRS will grant tax-exempt status to an LLC, should you decide to apply for it—again due to the passing through of tax obligations to each member of the LLC.

The Corporation

A corporation is similar to an LLC in some ways but is generally taxed as an entity. That means profits (or losses) are not passed-though to your personal income taxes. Additionally, in many U.S. States, a corporation is the only entity that qualifies for tax-exempt status. Like the LLC, the corporation also offers liability protection for its “owners.”

Upsides to a Corporation:

  • The tax rate for the corporation may be lower than your personal tax rate(s). Non-US residents can be “owners” of a corporation relatively easily. This is not the case with the LLC (but this is U.S. State specific)
  • You can apply for tax-exempt status with the IRS. There are some significant fees involved with the application process, so be sure that it will give you a long-term advantage

Downsides to a Corporation:

  • A bit more time-consuming to set up than an LLC, but well worth the effort
  • There is a formal requirement for record-keeping—things like agendas, meeting minutes, voting on resolutions, etc.
  • Requirement to elect corporate officers and to hold regular “shareholder” meetings
  • To be honest, all the above are things that a well-run club will want to do anyway, so there is very little extra work involved

There is no “one best way” here, and there are plenty of examples of flying clubs that operate under each of these entities. So, invest a few bucks and talk to an attorney. It’ll be the wisest expenditure you make during this process!

So, what if you decide to start out as an LLC and then decide sometime later to switch to a corporation, or from a corporation to an LLC? In most cases, you can do that one time in the life of the entity, but there are state by state differences that involve legal status, as well as State and Federal taxation - so what should you do?  Let’s all say it together one more time: Talk to an  attorney and do it early!

Tax Exemption

If you want to be tax exempt, you’ll generally have to form a corporation. Achieving tax exemption is difficult under an LLC.  Before going any further, remember that we’re talking general guidelines here. You should always consult an attorney or tax expert before making these decisions. Mistakes are hard to fix after the fact.

Most flying clubs apply for tax-exempt status as a 501(c)(7). This is for a social club. It shouldn’t be a surprise that there are specific requirements, after all, we're talking about the IRS. 

However, applying under this section is pretty easy, using IRS Form 1024. Here’s another helpful link: https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs

Some flying clubs apply for tax-exempt status as a 501(c)(3). This is for  charitable, scientific, educational, or religious organizations. There are some serious hoops to jump through for the 501(c)(3), but it might be the best fit depending on your mission statement.

In Texas, the Nate Abel Flying Club was granted 501(c)(3) status. Here is their mission statement: The Nate Abel Flying Club is a non-equity, educational, nonprofit corporation offering a unique culture of community engagement, flying, fun, proficiency, safety, camaraderie, and collaboration in a cost-effective manner for both aspiring aviators as well as for existing pilots.

Similarly, the Greater Houston Soaring Association operates as a 501(c)(3) because of their educational activities and community outreach.

If you decide to pursue tax-exempt status of any kind, consult a qualified attorney or CPA who has experience doing this. It’ll be the second wisest decision you make during this phase of organizing your club—the first seeking professional help in establishing the club’s legal status.

OK, so there’s a lot to digest here! Don’t get discouraged. AOPA is here to help you whether it’s our in-the-field Ambassadors, or headquarters staff in Frederick, Maryland. Don’t hesitate to contact us with questions by email at [email protected].  We LOVE to get flying clubs off the ground—if you’ll pardon the pun.

Next Section: What's It Going to Cost and How Do We Pay for It?