New LLC advice appreciated

[GregInMI]

I am helping with the footwork in getting an LLC set up for myself and 4 other pilots to purchase an airplane. Not being a lawyer or having one as an immediate family member, I'm curious what problems and/or issues others around here have encountered. Any advice is appreciated before I engage a lawyer and start paying out our hard earned dollars.

Thanks,
Greg

 

[Len Lanetti]

I'm curious what problems and/or issues others around here have encountered.

I've gotten bad legal advice from people with unverified credentials.



Len

 

[Jeff Oslick]

Greg,

My 182 is owned by an LLC that we formed for 3 partners to operate the plane. First, LLC stuff is State-specific, so you'll need to look up the appropriate information from the appropriate state agency (is the Secretary of State's office in CA).

You will need an LLC operating agreement. We combined our LLC operating agreement and aircraft operating agreement into a single document, though you can do them separately. We started with the AOPA template partnership agreement and modified it to suit our needs, then had it reviewed by an aviation attorney. As an LLC, we had to add several clauses related to the LLC operation. If you or any of your partners has AOPA's legal services plan, you can get one hour (each) of an attorney's time to review the documents. If you don't have AOPA's legal plan, I recommend getting it - it's very cheap insurance in any case.

One significant headache we ran into was the LLC registration and banking issues. In California, it takes a couple months for the LLC paperwork to get processed by the State, and you can't open an LLC bank account until all the paperwork is processed. Talk to your bank early in this process, and get it in writing exactly what they will require. Also, you'll probably need an IRS Employer Identification Number for banking/tax purposes. The EIN is easy to get, and can be obtained for free and instantly online from the IRS.

My recommendation would be to have the purchase of the aircraft made from funds already in a company bank account so that there is no question that the LLC is buying the plane, not the individuals involved. There are also a couple details on filling out the paperwork for the FAA registration, but they were pretty simple (once I figured it all out).

You should also talk to a Certified Public Accountant who is familiar with small businesses, or, if you can find a good one, someone who is experienced with aviation businesses. Get your accounting system coodinated up front.

Finally, and above all else, you MUST treat this like a real business at all times. Keep all the finances separate from personal stuff. Keep accurate and complete records, and have regular (quarterly) documented meetings of the LLC members. This is your only real protection from a legal standpoint. If it is an LLC in name only and you are operationally treating it like an informal partnership, you are a great risk of "having the corporate veil pierced" if any liability issues come up. I'm not an attorney or an accountant, and as I've said, I sought professional assistance to check that I was doing it right. Just trying to share my experiences.

I'd be glad to help you by sharing our operating agreement with you, let me know if you'd like to see it.

Talk to your partners at length about what-if scenarios. Be sure you're all on the same page. I'm lucky in that I think I've got a couple of really good partners who are also safe, conservative pilots. For me it has been a lot of work, and all the work has been completely worth it.

Jeff

 

[Henning]

I am helping with the footwork in getting an LLC set up for myself and 4 other pilots to purchase an airplane. Not being a lawyer or having one as an immediate family member, I'm curious what problems and/or issues others around here have encountered. Any advice is appreciated before I engage a lawyer and start paying out our hard earned dollars.

Thanks,
Greg

If you don't want to pay out to a lawyer, the best way I have found when incorporating is to contact that State's State Department. Some states have complete "Incorperation Kit's" available online. Since they are the people who govern the process, might as well go to the horses mouth. There is also "Boilerplate Software" as well as boilerplate forms available from office and business supply stores. The process itself isn't really difficult, it's getting the specific partnership agreement worded right, that's where a good lawyer involved will earn their fee if ever.

 

[Jeff Oslick]

If you don't want to pay out to a lawyer, the best way I have found when incorporating is to contact that State's State Department.

Agreed. I did not use a lawyer for the actual filing of the LLC paperwork - for me it was one of the simplest parts of the process, and I did it myself. Having a legally valid and enforceable operating agreement was a more complex issue that I'm glad I had an attorney review.

Jeff

 

[Henning]

Having a legally valid and enforceable operating agreement was a more complex issue that I'm glad I had an attorney review.
Jeff

Yep, that's always the tough one to work out. I have found though, that I just don't want to deal with it. Anymore, I do all my business on a handshake, and what's nice is I have only been burned a couple times and never completely. I figure over the decade, I'm still money ahead figuring what I've been burned vs. what I'd have spent on lawyers hashing contracts.

 

[Dave Siciliano]

I have a couple of LLCs. One for the P-Baron and couple in my business.

Not difficult or time consuming in Texas, but a lot of details need be attended to. Funds need be kept separate and you need to have board meeting where officers are elected, etc. If you've ever run a corporation, it's just another form. If you don't have experience it this, do some reading and get some advise.

There's a good article called, "Don't Put Your Client's Shinny New Corporate Jet into A Sole-Asset L.L.C." that addresses issues a corporate user that lets professional pilots fly the aircraft can get into. For owner pilots, it's not applicable, but worth the read (Texas Bar Journal--April 2002). Another article is called "The Flight Department Trap". These essentially talk about corporate operations that can cause the need to comply with other than part 91 (unintentionally).

There are infesting FAA interpretations and cites that give excellent insight about liability and how some simple deviations in operations could open one up to liability.

All the L.L.C. seems to accomplish here in Texas, is to insulate one owner from liability cased by the actions of another owner.

Best,

Dave
(Not an attorney--not trying to be one, but operator of several companies.)

 

[Jeff Oslick]

All the L.L.C. seems to accomplish here in Texas, is to insulate one owner from liability cased by the actions of another owner.

That is exactly my read on what the LLC does for us in California as well. It is basically another form of insurance.

Jeff

 

[John J]

Dave;

I did a Chapter S on one partnership and it worked out real well. Other wise I did what Henning sugested; a hand shake with a basic contract that is hammered out ahead of time. LLC raise many red flags with the IRS and the work is just not worth it. I am not an Attorney but do believe so much in the KISS principle.

Good luck and check out all the avenues.

John J

 

[T Bone]

Greg, a good friend of mine (also in S.E. Michigan) is in the process of forming an LLC partnership for a rather costly plane. The two gentlemen have found an aviation oriented attorney they feel is very good, and he's local. I'd be happy to get contact info for him if you'd like.

 

[GregInMI]

Thanks for the good info so far. To respond back to a few comments, I do have the AOPA Legal plan and plan to use that free hour. Also, I have the same impression (and expectation) that an LLC protects me against mistakes made by the other pilots in the LLC.

Here's a question for the folks that currently have an LLC. How did you account for a partner leaving the LLC? Did you agree they get their original investment back?

Thanks,
Greg

 

[bbchien]

Thanks for the good info so far. To respond back to a few comments, I do have the AOPA Legal plan and plan to use that free hour. Also, I have the same impression (and expectation) that an LLC protects me against mistakes made by the other pilots in the LLC.

Here's a question for the folks that currently have an LLC. How did you account for a partner leaving the LLC? Did you agree they get their original investment back?

Thanks,
Greg

This is called a succession plan, or a restricted shareholder agreement in your case. No, you never get the original investment back. You get one /nth of the current value back. If the value goes down, last one out is holding an empty bag.....

 

[AdamZ]

Keep a few things in mind. 1) Corporate laws differ from state to state. What applies in Pennsylvania may not apply in Michigan, the devil is in the details. 2) No one ever gets into an arrangement be it a partnership, corp or LLC intending it to go sour. Sometimes the best way to keep things friendly is to have a contract that spells out all contingencies. The less room for interpretation the less room for disputes. I expect that this will be a rather large investment. Why would you skimp on something such as a good attorney who can help protect you and your investment? The "act of incorporating is nothing compared to the ground work that must be done to make it all work. The amount you will pay in legal fees will be negligible compared to your investment in the plane. Just my two cents worth.

 

[Dave Siciliano]

Greg:

In the LLC and in all my partnership dealings (all my real estate developments are in limited partnerships and the developer is a corporte entity like an LLC) I have a buy/sell agreement. Also referred to as a divorce clause. The basic concept is this: one partner can always offer to purchase the enterest of the other parther(s). If that partner makes an offer, the other partner(s) can either agree to sell for that amount, or match the first partys' offer and buy them out for the same price.

This keeps everyone honest. You don't make an unfair offfer because the other party can match it and you lose.

In real life, this is a last resort. First, you might let the partner find a replacement. Then you can value the plane and divide interests for value as Bruce said. In the end, if you disagree, the buy/sell can be executed and one partner (group) can wind up with the plane.

Many folks don't do this and wind up in trouble. In a three partner Baron here at Addison, two of the partners had to kick out the third partner after he failed to meet obligations. The guy would not sign over his interest, so the other partners had to sue. It took them over two years to get him out. In the mean time, they paid all the bills and couldn't sell their interest while legal proceeding were in process.

Have a realistic exit strategy. In a down market, a partner may not agree with value and may not be able to bring in another partner. In the end, have a way for one party (group) to get control. As a last resort, the plane can be sold and the proceeds divided up, but a buy/sell can avoid this.

Best,

Dave

 

[Jeff Oslick]

What we did to address the "pay me what my share is worth" question is to establish an agreed upon valuation of the aircraft every 6 months. Doing this in the good times establishes a strong basis for the valuation if things go south.

Jeff

 

[rfbdorf]

The most important part of the whole procedure is writing a good and complete agreement. We based ours on the sample available on the AOPA web site, with additions and change tailored to our needs. Then we had a lawyer look at it (through AOPA legal services - all 4 of us subscribe); he had a couple of suggestions. Our agreement spells out exactly how members can leave and enter, valuation, dues, assessments, hourly fees, responsibilities, flight rules, etc. In Oregon filing a LLC is almost trivial. Look for your state's corporate division web site to find out what it takes where you are.

- Richard

 

[More Right Rudder]

So how does an LLC prevent someone from getting your assests? I can see the plane might be protected, but wouldn't the pilot be sued? You can't protect pilots with an LLC, can you?

 

[PaSkyhawk]

So how does an LLC prevent someone from getting your assests? I can see the plane might be protected, but wouldn't the pilot be sued? You can't protect pilots with an LLC, can you?

You can't protect the person that was flying the plane, but you can protect the other shareholders from liability beyond the worth of the plane.

Not a lawyer,
Rich

 

[Dave Siciliano]

When you set up separate entities, each creates a layer which must be penetrated to get to assets. The LLC is treated like a separate entity. To go outside that entity (if properly established and run) may be time consuming, costly and difficult. The advantage of the LLC in Texas, is it can make it more difficult to go after the non-pilot shareholders/managers. You need to speak to legal counsel for more details; I've just painting with a broad brush.

Taken to an extreme: Have you read anything about Gene Phillips here in the Dallas area and his indictment about a year ago? He was accused of violating a number of laws, but it was very difficult to prove. He had at least 85 different entities over which he had control and they had very sophisticated inter dealings. It took investigators years to piece thing together and pierce some of the corporate veils. He was finally indited for securities laws violation, but it was very time consuming, costly, frustrating and they probably couldn't substantiate the worst violations.

What many folks do is set up an LLC and purchase adequate insurance. If something goes wrong, the insurance company should provide a vigorous defense, then provide enough coverage to settle the claim. It's easier for everyone to walk away with some satisfaction and for the owners to keep personal assets. Unfortunately, in a partnership, C corp. or in some other entities, it may be easier for the plaintiff's attorney to name all the other shareholders/partners in the action and try to attach their personal assets. The LLC can offer some benefits for the others if one partner/shareholder was negligent and the others didn't contribute to that.

Once again, I don't practice law and this isn't advise; I'll just trying to explain in general. If you're going to purchase a plane (or own one), the small amount of money it would cost to get competent legal advise is very worth while. The LLC may also allow you to transfer interests in the plane without creating a sale (which could avoid sales tax). OTOH, if you use a corporate form of ownership, local tax folks might presume it's a business aircraft and try to impose levies associated with that. Here at Addison, corporate aircraft that are used for business are taxed on the annaul value. There are so many considerations, you really need to read through them and get advise if seriously considering their use.

As an aside, the P-Baron I'm purchasing (from a group where one shareholder is an attorney) is in an LLC. My partner and I formed one to make out purchase.


Best,

Dave

 

[SCCutler]

I AM an attorney, and I endorse much of what I have seen above, and have several other comments.

First of all, before you form the LLC, consult with a CPA to be certain that the LLC is the form of entity you should be using. IN most states (Texas included), corporations and LLC's are equally simple to prepare and similar in cost. If there is a deciding factor, it might be the tax and accounting aspects.

All else being equal, I tend to prefer old-fashioned corps over LLCs, simply because of the maturity of the business form. You can get similar tax treatment by electing Subchapter S status (but, again, ask the CPA).

AOPA's base documents, referenced above, are some very good docs for starting points, but you must get advice of counsel. Most important at the outset, as a little expense up front (and it need not be many thousands) can help prevent a lot of expense later. Put another way, if you cannot agree on a succession and dispute resolution plan up front, when the happiness and good expectations are at their peak, why would you expect to be able to do so later, when (arguably) diputes have soured the relationship.

And I am a big fan of the buy-sell scheme mentioned earlier, with the "make an offer you're willing to accept yourself" concept (we call those "put-call" agreements). Keeps it real. Agreed values periodically are even better.

Don't skimp on getting counsel up front; I cannot count the number of times I have had disputes between business participants who "saved money" by avoiding use of counsel when putting together a deal, then spent it all and more when the trouble arose. Corporations, LLCs, LPs and the like exist by operation of law only, and you have to ensure that you are complying with the technical aspects of so doing. Envision an accident situation, insurance carrier investigates the corporate status of its insured, decides to decline coverage because the "insured" was not operating the aircraft because corporate formalities had not been adhered to... collect premiums, deny claims...