Club or LLC Partnership

[Ventucky Red]

From the thread earlier this week... if stating new, what would be the better arrangement for a partnership... to set it up as a Non-Profit Social Club, or an LLC... Is there any advantage with either?

 

[bradg33]

From the thread earlier this week... if stating new, what would be the better arrangement for a partnership... to set it up as a Non-Profit Social Club, or an LLC... Is there any advantage with either?

Depends on what your goals are. Want to have every member own real equity in the Club? LLC. But that also comes with some additional burdens (K1s, etc.). Depending on the state, a non-profit corporation can be easier to manage and easier to come and go from. But nobody really "owns" the corp (depending on the state of formation).

 

[aggie06]

You could set it up as a taxable corporation to avoid K-1s. With current tax reform plans that may lower the corporate rate and start to tax partnerships like they are corporations, it may make more sense to do that. If you can wait until April/May, I'd do so. I expect we'll have a pretty good idea what the House is going to push through by then.

You can manage the income of the corporation through depreciation and other expenses, but you will get into the equity accounting questions. Those can be complex.

 

[weilke]

Your LLC should not show a profit. Taxation is only an issue with regards to property tax and use-tax.

 

[GlennAB1]

I'm guessing an LLC would require more legal paperwork when partners are added or leave in comparison to a club.

 

[midlifeflyer]

I'm guessing an LLC would require more legal paperwork when partners are added or leave in comparison to a club.

"Club" doesn't really mean anything from a legal standpoint. There may be one but, so far, I haven;t come across a state in which "club" is an official legal entity. A club can be a nonprofit corporation, a for-profit corporation, a partnership, an LLC, or whatever other forms a state allows. And, if by "club" one means a nonprofit corporation, there's going to typically be more legal paperwork with that form than with an LLC.

I agree with @weilke that, typically, these kinds of entities have no income and show no profit. But choice of form is a combined legal and accounting question. The tax question is whether there is a tax benefit to one form over another. The "legal" question is which form of available entity will best protect the members from club liabilities and the club's assets from the members' liabilities.

 

[flyingron]

He's in California. There's a minimum ($800) franchise tax on the LLC even without income. Note that LLCs themselves can be treated as corporations or partnerships for tax purposes.

 

[airdale]

You really should consult an attorney who specializes in non-profits. I know a little about the subject but zero about California law.

Entities like LLCs, S corps, public benefit corps, and C corps exist to shield the owners from the liabilities of the entity. They have nothing to do with tax status. You want to be shielded and also have a liability policy that will defend both the club and any individual members who are sued. When the PI snakes come around, they sue everybody and it is up to you as an individual to fight them off using the shield. That fight costs money, ideally covered by the club insurance.

Nonprofit tax status, probably a 401(c)7 for a flying club, has little to do with whether the club makes any profits or not. Profits are not taxed and may accumulate to an extent; the critical thing is that none of the shareholders can benefit from the activities of the corporation. If you want to see how concerned the IRS is about this, look at all the questions on the IRS Form 990 that attempt to dig out situations where someone is benefiting/aka whether the nontprofit status is fake. guidestar.com is a great place to look at other clubs' 990s. Registration is free and they do not spam you.

Your state may have laws that specifically address flying clubs both for regulating and, again, attempting to root out businesses that are fake flying clubs. Check your statutes.

Sales tax rules apply. For example, everything related to buying and maintaining the airplane(s) may be exempt from tax because the club is considered to be a lessor who is required to charge sales tax on the hourly rentals, dry or wet, again depending on the rules. Dues may also be taxable. Or not. Almost for sure you will have to get a state sales tax permit/registration number.

This all sounds like quite a swamp and it can be if you blunder into the swamp in complete ignorance. But it's like any game; once you know the rules the action is easier to understand.

POA is a great place to gather opinions, some high quality and some not. My favorite internet cartoon: https://en.wikipedia.org/wiki/On_th...ows_you're_a_dog#/media/File:Internet_dog.jpg Good luck.

 

[coloradobluesky]

LLC can be made for $100 online. Just write out the bylaws for running the partnership on paper. If the LLC doesn't have any income, profits etc from selling stuff or selling labor, it doesnt need to file with the IRS. A partner paying his expenses is usually NOT income in this type of club. And it doesnt have to be nonprofit. The LLC is just a holding company for the plane and has partner structure. If it does have income then any accountant can handle it. There is some yearly maintenance to running the LLC. The airplane can be put in the name of the LLC right from the initial purchase. You can do it afterward too, but you are going to have to figure out about sales tax exemption on that transfer. I dunno know how to do that one. Best to put the plane into the LLC right when you buy it. You register the LCC with the FAA by sending the FAA the bylaws. Open a checking acct in the LLC's name.Run all the money through the checking acct. There is a way to get a credit card also and pay it with a check from the LLC aact.

Your biggest headache is going to be dealing with partners. Make sure they have plenty of money....cause they are going to need enough to pay expenses. LLC is made for this kind of partnership. And running it is as simple as it gets.

Dont get hung up on the structure. The important thing is the airplane and partners flying and paying their share. That and avoiding disputes.

 

[midlifeflyer]

LLC can be made for $100 online.

That depends a lot on state law. The state fees for a Colorado LLC are $50 to set it up and $10 each year to file the annual report. OTOH, in North Carolina, it's $125 to file and $200 per year. And someone already pointed out California's $800 annual franchise tax.

Yeah, the one thing folks really skimp on is the agreement among the partners/members/whatever. Works great until it doesn't. Then it gets really ugly.

 

[flyingron]

Entities like LLCs, S corps, public benefit corps, and C corps

Actually, you only have two "entities" in that list. LLCs and Corporations. The S and C just qualify the tax treatment for the corporation. An LLC can be treated taxwise like either of those as well as a partnership or sole proprietorship. About the only thing you can't get is an LLC for a 501(c) tax exemption, that requires an actual corporation.

Yep, in Virginia I think it costs me $50 for my annual filing for my LLC. However, you must pay the $800 when you create the California LLC and then every year thereafter (more if you actually have income).

 

[airdale]

... the agreement among the partners/members/whatever. Works great until it doesn't. Then it gets really ugly.

Amen to that! I am a SCORE small business mentor and one of the things I pound on my clients about is that they need a good buy/sell agreement. Lots of things to consider, like: What if a wife gets half of a club member's equity in a divorce? What if a member stops paying; is it charged against his equity? What if the membership ends up being owned by a trustee for a deceased member's kids and the trustee wants out? What if members are expected to contribute sweat equity by cleaning airplanes, working on the hangar, and one refuses or is unable to do it? .... and on and on. The more you discuss and cover the less likely it is to get ugly.

 

[JimNtexas]

I can talk to this from a federal income tax point of view. I think a good organization for an ownership flying club is the 503 c(7) 'Social Club'. Social Clubs are exempt from federal taxation unless they have business income from a source unrelated to their main purpose.

You must elect this form when your club starts, there's no 'do-overs' if you start with another form and then want to change to c(7).

Essentially the c(7) is designed for country clubs, but it's a good form for any non-profit club, where 'non-profit' means The organization’s net earnings may not inure to the benefit of any person having a personal and private interest in its activities.

One thing to note with any non-profit, including your kid's PTA. The non-profit must file a form 990 report every year or face substantial penalties. Lots of volunteer run non-profits miss this requirement, typically when the long time treasurer moves on and the new guy doesn't pick up the baton.

I'm an Enrolled Agent (but not your Enrolled Agent), so while I can make suggestions with respect to the federal tax code, I'm not a lawyer and can't tell you which legal entity form is best for you concerning liability or other legal issues, nor do I know about your state tax structure.

 

[weilke]

A regular 'taxable' LLC or Corp won't owe any income taxes if you calculate your monthly assessments and hourly rates in a way that you don't have any profit. Unless one of the members tries to claim a business loss against other income, the IRS doesn"t care if your business shows a small loss year after year. The difficulty is if you start to build something like an overhaul reserve, you have to treat your overhaul as a capital expense and depreciate it to offset that 'profit'.

Running a non-profit is a bit of a minefield as you are dealing with the IRS nonprofit division whose only mission in life is to bust fake non-profits that benefit the founders. You are also subject to your state's secretary of state or attorney general oversight. If you don't do it right, you may end up donating the cash value of your plane to another non-profit just to be allowed to dissolve your club. I just don't see the benefit of running it as a non-profit as there is really no taxable profit if you pay your bills as they come due.

 

[airdale]

I can talk to this from a federal income tax point of view. ...

And do a good job, too.

One point on the 990s: It's really not too terrible. The biggest pain is trying to understand and answer all the pages of questions that do not pertain to you. They are pretty much the same from year to year, though, so once you have slogged through this you can pretty much just lay last year's return next to this year's and copy the "x" marks. The next biggest pain is filling in the revenue, expense, and balance sheet values where your chart of accounts is organized differently from the IRS's idea of how it should be done. So I'd suggest laying out your chart of accounts with the 990 in mind and permit differences only where they are important to you.

You also may not have to file the full 990: https://www.irs.gov/charities-non-p...-do-exempt-organizations-file-filing-phase-in

A regular 'taxable' LLC or Corp won't owe any income taxes if you calculate your monthly assessments and hourly rates in a way that you don't have any profit. Unless one of the members tries to claim a business loss against other income, the IRS doesn"t care if your business shows a small loss year after year. The difficulty is if you start to build something like an overhaul reserve, you have to treat your overhaul as a capital expense and depreciate it to offset that 'profit'.

Running a non-profit is a bit of a minefield as you are dealing with the IRS nonprofit division whose only mission in life is to bust fake non-profits that benefit the founders. You are also subject to your state's secretary of state or attorney general oversight. If you don't do it right, you may end up donating the cash value of your plane to another non-profit just to be allowed to dissolve your club. I just don't see the benefit of running it as a non-profit as there is really no taxable profit if you pay your bills as they come due.

I beg to differ. There are no monsters hiding under a nonprofit's bed. Getting it set up properly with a good set of bylaws, then filing for 501(c)7 status is easy and straightforward. Whether nonprofit or not, you still have to file a tax return, so there's no saving there. And screwing around to make sure you don't show a profit is a waste of time. In years with low maintenance, your books may show a profit. In other years, a loss. With non-profit status you don't have to worry about that. Same-o on engines; set up the books the way you like, showing engine reserves and/or depreciating engines, it doesn't matter to the IRS.

Finally, IMO "dealing with the IRS nonprofit division" in an audit is extremely unlikely. They have much bigger fish to fry and the cost/benefit equation just doesn't motivate them to sniff around minnows. @JimNtexas may have a comment on this, but I think your safe harbor in the very unlikely event of an audit is this: "Gee, I'm sorry. I'm not an accountant. Can you show me what we have to do to comply with the rules and we'll just do that from now on?"