|The Sole Purpose Company Trap: The FAA Rules|
Traditionally, Part 91 applies to flights conducted by the owner of the aircraft. Where the owner is an individual, Part applies to all flights. Where the owner is a company, Part 91 applies to flights made in connection with the business of that company.
In 1972, the FAA amended Part 91 to allow a company to provide transportation to related companies and to defray the cost of aircraft ownership by providing transportation to others under time share, interchange or joint ownership agreements. However, the rules continued to contemplate that the company owning the aircraft is using the aircraft in connection with their own company business. This was made clear in the preamble to the regulations and in subsequent FAA opinions which state that the creation of a subsidiary "solely for the purpose of providing transportation to the parent corporation, a subsidiary, or other corporation" is not allowed. Furthermore, under FAA policy, this limitation applies to all legal entities, including a limited liability company (LLC), which is treated as a "pass-through" entity for tax purposes.
Some practitioners have objected that this policy does not allow an individual or a company to avoid liability by putting the aircraft and crew in a separate corporation. In fact, this may be precisely why the limitation exists. The FAA is primarily concerned with "safety of flight". In essence, Part 91 recognizes that an aircraft owner should be allowed to risk their life in their own aircraft. However, if an individual or company is allowed to avoid liability by putting the aircraft in a separate, the FAA might feel that the owner will have less of an incentive to properly maintain the aircraft. Thus, the whole purpose of the rules might be to prevent an owner from avoiding liability for negligent maintenance or operation of the aircraft.
In the real world, this concern is unwarranted, since an aircraft is generally used to transport key executives who are unlikely to allow the company to put them in an unsafe aircraft. Under the right circumstances, liability can be minimized by transferring the aircraft to a company in such a way that the "sole purpose company" limitation is avoided. In other cases, this is not possible.