Joe and his partner in a CPA firm, Bill, have gotten a new contract for services for a company on the other side of the state of Pennsylvania, about 125 miles away. It takes almost three hours to get there by car due to traffic and back roads. So, they decide to buy an aircraft to shorten the trip. Besides, Joe has a place in Myrtle Beach where he would like to fly for weekends rather than the 10-hour drive. And Bill has a son a few hundred miles away he likes to visit. So, they buy a Cessna 182 in great shape, with low time, and up-to-date avionics.
They decide on a co-ownership personally rather than putting the plane in the business name to avoid putting the business at risk, on the advice of a friend that is a real estate lawyer. After all, most of their trips will be personal anyway.
Joe gets a call from a Myrtle Beach neighbor who needs to set up business accounts for a new business he is setting up. So, Joe combines his usual long weekend with a meeting Saturday morning with his neighbor. Landing at Myrtle Beach, Joe lands in a 30 mph crosswind and loses control of the aircraft, running into a Gulfstream in the runup area, causing a fire and killing a prominent businessman. Joe and Bill are both sued for $5 million. Bill wonders why he is included in the lawsuit since he was not connected to the trip. But since there was a business
meeting for their CPA firm connected to the trip, it was a joint venture for the business, and both partners can be liable.
Clients often ask me about what precautions to take when owning an aircraft with another person or entity. Should they just check “Co-Owner” on their FAA Application for Registration? How about “Partnership”?
First, remember that registration with the FAA does not define what a relationship legally is. So, if you check that you are to be co-owners, but then you act as partners in a business or joint venture, you are partners in the eyes of the law. So what, you might ask. Well, if your partner is flying the aircraft and is negligent and injures someone, or damages property, like Joe in the example above, guess who is also liable? All the partners. But you have insurance, right? Sure, unless you purchased the insurance as co-owners, and there is an “exclusion” for operating the aircraft in a business. And what are the insurance limits? If only $1 million, that would not cover the claim in the example.
And if you truly are co-owners, what are the issues? While you are not liable for each other’s negligence, you still can be responsible for ownership liability, such as failure to maintain the aircraft (e.g., failing to comply with a mandatory AD Notice), which causes mechanical failure and an accident. Both co-owners can be liable to anyone injured or killed or for any property damage. Hopefully, insurance will cover, but again, check exclusions such as flying an unairworthy aircraft.
But how much can that cost? I have had wrongful death cases where over $5 million was claimed for the death of a CEO of a company with a family. And there have been wrongful death recoveries at or over that amount, depending on the state law and the economic and general damages attendant to the particular person(s) killed or seriously injured.
What is the solution? I routinely advise my clients against either type of ownership and rather advise setting up a new entity, such as a corporation or limited liability company (LLC) to own the aircraft. My home state of Delaware is a great place for setting these up, with minimal complexity and excellent service. Which entity you select is often based upon advice from your accountant for tax reasons. But if that is not an issue, I usually suggest a corporation.
LLCs are relatively new. The first ones were authorized in Wyoming in 1977, with Delaware coming along in 1991. As such, they may not be as well recognized by courts as corporations (around for centuries), especially in other states, when claiming they are the owner of an aircraft, as opposed to the members of the LLC. This can result in personal liability for the members. Unlike corporations, LLCs have no by-laws, are not required to hold annual meetings, do not have to file annual reports with the state, etc. So, the “records” that might be presented to prove legitimacy may well just be the Certificate of Formation, the Member Certificates, the Operating Agreement, and the financial documentation. So, a court might decide the LLC is a sham, especially in a state where they are not well recognized.
On the other hand, a corporation is much more formal and more likely recognized as legitimate if set up and operated properly. This means usually having an attorney set it up, getting a “corporate kit” with corporate seal, by-laws, share certificates, initial and annual meeting forms, shareholder lists and contributions, etc. Then setting up a bank account in the corporation’s name, always being billed for aircraft service in the corporation’s name, paying with a corporate check, making all contracts in the corporate name, etc. Not doing all these things can also lead to a court deciding the corporation is not legitimate and “piercing the corporate veil.”
Jim, you need to write a follow up column on the perils of using a sole purpose entity. Avoiding the conflicting FAA, IRS, and other local regulations is a game of whack-a-mole.