In recent years there has been a marked increase in the use of limited liability companies (LLCs) and single member LLCs (SMLLCs) for business and tax reasons. In most cases, the LLC offers the dual advantages of limited liability along with passthrough treatment for tax purposes. These characteristics would appear to make the LLC an ideal entity to own an aircraft. However, in fact, quite the opposite is true. The use of an LLC might lead to problems with the FAA, the IRS and your insurance company.

THE FAA AND INSURANCE RISKS

The FAA and insurance risks arise where the LLC is created solely for the purpose of owning and operating the aircraft, as discussed in The Sole Purpose Company Trap. In order to avoid FAA problems and to provide liability protection, the use of the aircraft must be ancillary to a business of the LLC. The problem is that this also puts the business and assets of the LLC at risk in the case of an accident. In some cases, the business can be restructured to avoid this problem.

TRANSPORTATION TAX

Where the LLC is used to provide both plane and pilots to other users, the Federal Transportation Tax might apply. The IRS has issued several rulings indicating that transportation provided to the partners of a partnership is taxable where an amount is paid for the transportation. Even worse, the use of an LLC as a corporate subsidiary (other than a single member LLC) might mean that payments for transportation do not qualify under the "affiliated group" exemption, since this kind of LLC is generally considered a partnership.

SALES AND USE TAX

Sometimes an LLC will be used as an Aircraft Leasing Company. However, the sales tax benefits might be jeopardized where the company is an SMLLC and the aircraft is leased back to the owner. This is because, in some states, the separate existence of the SMLLC is ignored for both income and sales tax purposes.