Were the annual reports timely filed with the Secretary of State for all entities in the chain of ownership of the aircraft? Were the annual reports timely filed with the Secretary of State for all entities operating the aircraft? The answers to these questions directly affects the flight department because the answers affect whether the aircraft is validly registered and operated in compliance with the US Federal Aviation Regulations (FARs).
Why the Flight Department Cares About Compliance with Governmental Requirements by an Agency Other Than the FAA
The FAA’s position is that an entity, such as an LLC or corporation, that has lost legal status in the State in which it has been incorporated is neither eligible to register nor operate an aircraft. This position was stated in a December 2017 response by the FAA to a request for a legal interpretation.
What is Legal Status?
Legal status of an entity generally means the standing of that entity in the eyes of the law. This definition may be different for each state. An LLC loses its legal status as an entity if it does not follow the state’s statutes and regulations for filing its annual reports and paying its annual franchise taxes. An entity’s legal status is usually “Good Standing” if the entity has satisfied all of the state’s requirements. The flight department does not need to delve into these statutes and regulations, however the flight department should annually obtain confirmation that the appropriate person has satisfied the requirements.
What is an Annual Report? What is Franchise Tax?
After an entity is formed, the Secretary of State where the entity is formed and where it has been qualified to do business requires annual reports to be submitted. The form usually requires basic information about the entity such as a list of the directors, officers, members or managers, authorized shares and other information about the entity’s corporate activity. Annual reports are required to be filed with the Secretary of State’s office even by small entities. The annual reports filed with the Secretary of State’s office are different than the annual reports which publicly traded companies issue and file with the Securities and Exchange Commission (SEC).
Most states require annual reports to be filed for corporations and LLCs. The reports may be due on the anniversary of the entity’s formation.
A franchise tax may be due for the privilege of doing business as an entity in that state. State requirements vary on franchise tax. Again, the flight department does not need to delve into franchise tax regulations, however the flight department should obtain confirmation each year that the appropriate person has satisfied the requirements.
Flight Department – Annual Check – Does Each Entity Have Legal Status
The flight department will generally not know when an annual report was filed or whether franchise tax was paid. Consequently, the flight department should annually request confirmation from the responsible person that each entity which owns an aircraft and each entity which operates an aircraft has legal status.
What Entities to Check for Legal Status
Due to today’s complex ownership structures, you will want to expand your request to ask whether each entity in the chain of ownership of the entity which owns an aircraft and whether each entity in the chain of ownership of the entity which operates an aircraft has legal status and is in good standing.
Aircraft Registration is Impacted if Annual Report is not Filed or Franchise Tax is not Paid
If an annual report for an entity is not timely filed or the franchise tax is not paid, the entity will lose its legal status and will no longer be in “Good Standing” with the Secretary of State’s office. After a period of time, the entity will be administratively dissolved by the Secretary of State.
An entity, such as an LLC or corporation, that has lost legal status in the State in which it has been incorporated (generally meaning, if they are not in good standing or have been dissolved) is not eligible to register or operate an aircraft.
FAR 47.3 defines who is eligible to register an aircraft. FAR 47.41 describes when a registration certificate issued by the FAA is no longer effective. The aircraft owner could be subject to enforcement action if a discrepancy between the legal status of the entity and its registration status is discovered in the course of an enforcement proceeding.
Currently, the FAA Registry does not make a determination as to the legal status of an entity at the time of registration or during registration. The FAA Registry relies on the certification provided by the entity registering the aircraft.
FAA Enforcement Actions
The entity which owns the aircraft could be subject to FAA enforcement action if the entity has lost legal status and the entity does not return its registration certificate to the FAA (because the registration certificate is invalid or lost effectiveness) per FAR 47.41(b) and 47.43(b), per a December 2017 Memorandum by the FAA in response to a request for a legal interpretation. Does your insurance policy require that your aircraft be validly registered in order to have coverage?
Aircraft registration issues can be complex and are subject to interpretations issued by the FAA. Many factors will affect the decision as to how you register, own, and operate an aircraft. The use of an attorney experienced in business aviation can help reduce costs and create a positive aircraft ownership experience.
Michelle M. Wade is a partner with the law firm of Jetstream Aviation Law and counsels clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.