Facts Change. It is a best practice to revisit this question every year.
Although the FAA’s general position has remained the same for decades, the FAA issued another written interpretation in December 2017 repeating its prohibition on flight department companies.
Two individuals own the LLC. The LLC owns the aircraft and the LLC operates the aircraft for a member for personal transportation and for others, but the LLC does not lease the aircraft. The FAA interpretation details how these facts are an example of a flight department company.
LLC’s Purpose-Provide Transportation
First, the main purpose of the LLC is to operate the aircraft to provide transportation. Therefore, the FAA determines the LLC’s compensation is derived from air transportation. The FAA broadly defines compensation and it includes capital contributions made by members of an LLC to fund the operating expenses of the LLC.
Aircraft Operations Not Within Scope of or Incidental to the LLC Business
The LLC’s aircraft is solely used for personal transportation of a member and of others. The flight operations are not “within the scope of, or incidental to, the business of the LLC”.
The FAA Looks at Its Regulations, Not Your Tax or Liability Concerns
The FAA also points out that the fact that the LLC is organized for liability purposes or set up as a disregarded entity for tax purposes does not change the FAA’s assessment.
How to Fix This Problem
First, look for the easiest resolution, which may be to add a dry lease from the LLC to the member.
Consider All the Factors
Don’t forget to consider all of the factors before you act.
The addition of a dry lease to fix an FAA problem could lead to other problems. Look at your state tax issues. How did you handle your state sales/use tax at the outset? What effect will adding a lease have on your tax liability? Also, look at your federal tax issues. Insurance is important and you also need to ensure your insurance policy recognizes the lease and names the lessee as an insured who operates the aircraft.
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.