If you have considered entering the world of aviation, you likely know how important the Federal Aviation Administration (“FAA”) is to your endeavor and the strength of its enforcement arm. Regardless of your experience in the industry, for years, many well-informed aircraft owners and pilots have unknowingly (or, in some cases, intentionally) broken the FAA’s rules. For the last several years, the FAA has been cracking down on the operation of “illegal charter” entities that have been rampant in the aviation industry for decades. If you do not adhere closely to the FAA rules around charter and leasing, the results could be devastating.
Titles 14 and 49 of the Federal Code of Regulations (“CFR”) contain the FAA’s regulations, with the sections inside those titles commonly referred to as “Parts,” which govern pilots, mechanics, flight schools, charter, leasing, and general aircraft operations. For the purpose of this article, the relevant Parts include Part 91 (General Operations and Flight Rules), Part 119 (Air Carriers and Commercial Operations), and Part 135 (Commuter and On-Demand Operations). There are other Parts that apply specifically to flight schools, Parts 141 and 61 but are outside the scope of this article.
Part 91 is the broadest and most applicable to private pilots as it concerns the general rules for operating any aircraft. Under Part 91, private pilots are effectively prohibited from receiving compensation for air transport. All pilots and aircraft owners must comply with the regulations under Part 91, while Parts 119 and 135 concern only commercial operators and air carriers. Understandably, the safety regulations and flight operator requirements for commercial operators and air carriers under Parts 119 and 135 are far more stringent than those under Part 91.
Upon the advice of their well-meaning attorneys, for years, aircraft owners have placed their planes in a limited liability company (“LLC”) for a variety of reasons. Typically this is due to their desire to receive the limited liability benefits that LLCs provide and to manage the aircraft’s books.
On paper, this sounds like a fine practice that thousands of aircraft owners follow each and every year. An aircraft owner purchases the aircraft and places it within an LLC for protection (or organizes an LLC, which in turn purchases the aircraft). Thousands of LLCs are the registered owners of aircraft with the FAA, but therein lies the problem.
An individual person as the owner/operator of the aircraft is a separate and distinct legal entity from his or her LLC (e.g., John Smith v. Smith Aviation, LLC). Mr. Smith may be the sole member of Smith Aviation, the sole pilot of the LLC’s aircraft, and for all purposes is the “owner,” but the FAA sees things differently – they look to the legal owner of the aircraft, not the practical one who will be doing the flying and maintenance. This means the FAA recognizes the LLC alone as the aircraft’s legal owner. As discussed below, if the LLC does not engage in any other functions, by which the aircraft is merely a tool, the FAA legally considers these LLCs to be “flight department companies.” [1] In other words, if the LLC allows Mr. Smith, a Part 91 pilot, to transport persons or members without receiving a commercial operator certificate under 119 or air carrier certificate under Part 135, Mr. Smith may be unknowingly breaking the law.
Over the last several years, the FAA has begun cracking down on these so-called “illegal charters” run by flight department companies. A private pilot operating under Part 91 to transport LLC members (including the owner) or other guests without complying with the certification and other requirements of Parts 119 and 135 is likely doing so illegally.
This conduct opens the owner/pilot up to liability and a possible enforcement action by the FAA. The consequences include civil penalties of up to $25,000 per flight completed without the proper commercial certificate, FAA license enforcement actions against the LLC and owner/pilot, piercing the corporate veil of the LLC in a civil action to reach the owner’s (e.g., Mr. Smith) other assets, and possible cancellation of the plane’s flight insurance.
How do private pilots who wish to use an LLC to protect their planes do so without needing to receive commercial certification under Part 119 or air carrier certification under Part 135?
There are two main solutions to this issue: 1) the owner must operate the LLC in such a manner that ownership of the aircraft is not the LLC’s sole purpose, or 2) the LLC must enter into a lease agreement with the individual owner.
The first solution is simple. The LLC is used for other business purposes, where the aircraft is merely a tool. Take, for example, a logging company that has its headquarters in Bismarck, North Dakota, that owns tracts of land near Bozeman and Butte, Montana. The management of the LLC may need to visit the tracts of land in Montana as part of its business operations, and the LLC can therefore operate the aircraft to allow the business to do so. The LLC purchases the aircraft for use in traveling to and from the tracts of land and is merely a tool of the logging company. In this case, the LLC’s sole purpose is not merely to hold the aircraft.
When the LLC does not have another business purpose for the aircraft, then the more practical solution for most private pilots is the second option, a lease arrangement. The agreement, in this case, involves the owner of the aircraft (here, an LLC) leasing the aircraft to another person or entity without a crew, typically the individual owner of the LLC. So long as the aircraft is not used to carry persons or property for hire/compensation, neither the lessor nor lessee need to hold an air carrier certificate. In practical terms, this would look something like this: John Smith organizes Smith Aviation, LLC and is its sole member. Smith Aviation, LLC purchases an aircraft, which is its sole asset and the purpose for the organization. Then, Smith Aviation LLC enters into a dry-lease agreement with John Smith—in his individual capacity—to operate the aircraft without a crew and without compensation. As a result, John can operate the aircraft under Part 91’s general operations and flight rules.
Everyone’s situations are unique, and if you are considering organizing an LLC to hold your aircraft, we highly recommend that you speak to competent legal counsel on the matter.
[1] Letter from Rebecca MacPherson, Assistant Chief Counsel, FAA Regulations Division, to James W. Dymond, Esq. (March 9, 2007), https://www.faa.gov/about/office_org/headquarters_offices/agc/practice_areas/regulations/interpretations/Data/interps/2007/Dymond-MooreVanAllen_2007_Legal_Interpretation.pdf
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