This topic sheet explains the advantages and disadvantages of incorporation for aircraft owners. It is written by aviation attorney and AOPA member Hilary B. Miller, Esq., and may not be reproduced without express written permission of Mr. Miller. Sources for additional help and information are listed at the end of this topic sheet. — AOPA Aviation Services, 8/22/96
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.
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.
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 over-emphasized enough: unless the corporation is truly separate from its stockholders, the corporation may be legally ignored by creditors and the courts.
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.
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.
Many people are aware of a 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. An S corporation can have a single stockholder, but in general an LLC cannot. 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.
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.
Helpful AOPA publications are listed here. Some have a small shipping/handling charge; many are available for download through AOPA's Web page.
Aircraft Insurance Companies:
And of course, you can always call AOPA experts for help or advice with any aeronautical problem:
AOPA Pilot Assistance Line 800-USA-AOPA (872-2672)