One of the most important decisions a club needs to make is how the club will be legally organized. Clubs should carefully consider the advantages and disadvantages of incorporating (Corporation), forming a limited liability company (LLC), or becoming an unincorporated association.
Requirements for corporations and LLCs vary from state to state. In most cases, it is recommended that your club seek the assistance of qualified legal and accounting professionals.
Forming a corporation is the most formal option. The club would have to file articles of incorporation with the state, and it is required to have by-laws and to keep written minutes of director and member meetings. Corporations must file tax returns and if annual revenues exceed expenses, the club will need to pay taxes on the profit. For example, a club collecting money for a reserve fund is likely to have revenue that exceeds expenses, and taxes would be due on the net profit.
The advantage of a corporation is members and shareholders generally cannot be personally liable for obligations of the corporation or damages caused by the negligence of other members. So if another member has an incident or accident with the club plane, as a general matter, other members would be protected from personal liability for the damages. Another advantage is the well-defined hierarchy of responsibility among officers, directors, and members.
If a club plans to file for a not-for-profit tax-exempt status with the IRS, a corporation is the best choice. The structure of a corporation mirrors the IRS’s not-for-profit paperwork.
The disadvantages include the expense of incorporating, which can vary, as well as the paperwork requirements – maintaining minutes, filing taxes, and other documents. The structure required for corporations provides a basic staff for some key and required positions such as president, secretary, and treasurer. Regular elections must be held and the participatory self-governance also will likely require assistance from legal and accounting professionals, which creates an ongoing cost.
Limited Liability Corporations (LLC) generally provide limited liability protection for members like corporations but are more flexible in nature. They don’t have the same hierarchy that a corporation must have. An LLC can be managed by all the members, designated elected officers, or a designated manager. They do not require meetings or minutes, although they are generally recommended as a good operating practice.
Clubs will need to file formal articles of organization with the state. An LLC also will want to prepare an operating agreement, which is similar to by-laws for a corporation. If the LLC has more than one member it will likely file a partnership tax return. It won’t have to pay taxes on revenue that exceeds expenses, like a corporation does, however, any profits would be allocated to the various members and taxed to the individual members of the LLC. Annual fees charged by the state may be more than annual fees paid by a corporation.
The unincorporated association is an informal group with no recognition as a legal entity. They are sometimes used for non-profit flying clubs, but may not be the best option for most clubs.
The advantage is the club doesn’t have the expenses required to form a corporation or an LLC. However, the big disadvantage is the exposure of members to personal liability. For example, each member is potentially liable for damages to other persons or property caused by fellow members using the club aircraft. This is usually a deal breaker for most clubs.