Partnerships…

[Ventucky Red]

Now that the IPC is out of the way, I am going to be sitting down in a week or so to get serious about buying out on of the partners on a Cherokee 180. It is a pretty clean aircraft with low airframe hours and mid time engine hours.

With that there has been some due diligence on my part as to investigating the aircraft itself, but there seems to be some grey area on the actual cost etc… Currently, they have a very lose structure on the plane; that is, if something needs to get fixed they just split it 50/50… Plane comes out of annual, they split it 50/50… and there is no hourly rate on the plane.. You fly you fly, just don’t leave the tanks empty for the next guy. It has been like this for the past ten years...

Would it be out of school for me to ask the following?

Ask to set up an hourly rate with that money placed into a separate account to be used for the maintenance of the aircraft?

Set up a engine reserve fund predicated on the current engine hours. Note, by asking to set up an hourly rate this will cover this moving forward, but what about the current hours on the engine... How should this be handled.. The plane just came out of annual with great compressions and good oil analysis… I will be talking to the mechanic that has been working this plane for the past 10 years as well.

Also, currently the two gents in the plane do not have a LLC set up.. With only two people would this be a concern? In California it is about $850.00 per year to maintain the LLC.

And finally, those of you in a partnership, what is working and what is not working for you.

Thanks

 

[Topper]

Be careful with the LLC. According to our attorney as soon as you put an airplane in an LLC that has no other function that to hold the plane, the FAA considers it a commercial venture and treats you like a 135 operator.

I put my plane in an LLC that I already own that is my primary venture.

 

[Threefingeredjack]

Be careful with the LLC. According to our attorney as soon as you put an airplane in an LLC that has no other function that to hold the plane, the FAA considers it a commercial venture and treats you like a 135 operator.

I put my plane in an LLC that I already own that is my primary venture.

That is not the case in my experience. If you clearly state in the articles of the corporation that the aircraft is for personal use only you are fine, at least in Oregon. ( Luckily I get to sleep with a really sharp attorney who specializes in corporate law)

To address the OP's other questions:

I am a 50/50 partner and have been for 5 years now. We have a fixed fund, (hangar fees, insurance and annual) and an hourly fee to cover engine overhauls. (Our engines are about 700 hours apart) If the annual goes over our estimate we split it down the middle. Gas and oil is on the one flying.

 

[Speedy]

What ever you do, DO NOT go into airplane partneship with someone you have known. This venture didn't turn out well for us. It didn't last 6 months. Our old friendship now is very cold.

 

[Ventucky Red]

That is not the case in my experience. If you clearly state in the articles of the corporation that the aircraft is for personal use only you are fine, at least in Oregon. ( Luckily I get to sleep with a really sharp attorney who specializes in corporate law)

That is what I thought, that you need to spell out that this is an LLC to protect the assets outside of the co-owneship of the aircraft....

What ever you do, DO NOT go into airplane partneship with someone you have known. This venture didn't turn out well for us. It didn't last 6 months. Our old friendship now is very cold.

Roger Dat!! I had a chance to do this a while back, but as I had stated "I would rather lose you as a partner that as a friend."

 

[tinerj]

I'm partner with three others and it works great. One partner works full time and can only fly on weekends. Another is a dawn patrol fellow who flies two or three times during the week-days, but only for an hour or so and is done with the plane by 10:30 in the morning. One (me) is not a morning person and flies starting at about 11:00 on Tuesday or Thursday but seldom on any other day, and the fourth partner flies anytime the plane is available. The only conflict comes when we want to add something to the plane -- we end up doing nothing because we cannot agree.

In Missouri and Illinois, I've never heard of a personal use LLC giving rise to any concern from the FAA.

 

[Rwsavory]

No need for an LLC, but you do need a written co-ownership agreement.

 

[Ventucky Red]

I'm partner with three others and it works great. One partner works full time and can only fly on weekends. Another is a dawn patrol fellow who flies two or three times during the week-days, but only for an hour or so and is done with the plane by 10:30 in the morning. One (me) is not a morning person and flies starting at about 11:00 on Tuesday or Thursday but seldom on any other day, and the fourth partner flies anytime the plane is available. The only conflict comes when we want to add something to the plane -- we end up doing nothing because we cannot agree.

In Missouri and Illinois, I've never heard of a personal use LLC giving rise to any concern from the FAA.

Are you guys set up as an LLC?

No need for an LLC, but you do need a written co-ownership agreement.

So how do I cover myself from any liability incurred from the other partner?

Understandably we're going to want to be covered to the gills with insurance, but......

 

[wabower]

Form a single-member LLC to own your piece.

Are you guys set up as an LLC?



So how do I cover myself from any liability incurred from the other partner?

Understandably we're going to want to be covered to the gills with insurance, but......

 

[Non Compos Mentis]

What ever you do, DO NOT go into airplane partneship with someone you have known.

I vehemently disagree!

I have been in two 50/50 partnerships, both with people I know very well.
Both have been fabulous.

I would never go into an airplane partnership with a stranger. I want to know what I'm getting myself into. Partnering up with somebody I've respected for a long time is much safer than rolling the dice on an unknown quantity.

Neither partnership had any agreement in writing, or an LLC. The rules are simple- Each pays his own gas, everything else gets split down the middle.

The End.

 

[tinerj]

Are you guys set up as an LLC?
So how do I cover myself from any liability incurred from the other partner?

Understandably we're going to want to be covered to the gills with insurance, but......

Yes, in Illinois. An LLC still requires liability insurance, despite what the letters LLC stand for. At least with an LLC and adequate liability insurance, it is less likely that a liability will extend past the LLC to the actual partners.

An LLC does reduce my personal property tax (which for an airplane in my county in Missouri is taxed at the same rate as an automobile.)

 

[wabower]

+1. Why would you want anybody for a friend that you couldn't share a plane with?

I vehemently disagree!

I have been in two 50/50 partnerships, both with people I know very well.
Both have been fabulous.

I would never go into an airplane partnership with a stranger. I want to know what I'm getting myself into. Partnering up with somebody I've respected for a long time is much safer than rolling the dice on an unknown quantity.

Neither partnership had any agreement in writing, or an LLC. The rules are simple- Each pays his own gas, everything else gets split down the middle.

The End.

 

[jonnyjetprop]

It's all about attitude. Easy going folks that aren't worried about expenses to the absolute penny do fine in a partnership. If you are a my way or the highway kind of guy, not so much. If you pull out a calculator when you go to lunch with a friend, not so much. If you're anal about how the plane must be operated, not so much.

My limited understanding of LLC are that it wound be good in a partnership to protect you if your partner crashes. It won't do you any good if you are flying.

 

[Threefingeredjack]

No need for an LLC, but you do need a written co-ownership agreement.

So, you are willing to accept liability if your partner screws up and injures or kills some people??? I'm not.

 

[jbarrass]

+1. Why would you want anybody for a friend that you couldn't share a plane with?

+2. My last 2 planes have been in a partnership with a friend. People overthink these things.

We split the costs as they come up 50/50. Each on his own for fuel.

We have insurance for the liability concerns.

At the Cherokee level, this isn't rocket science or high finance....

 

[alang]

I am not a lawyer but in CA it was strongly recommended that we use an LLC for a partnership. It does protect you from liability issues created by your partners. Does nothing for you.

I've never heard about a 135 issue. Our partnership clearly states the goal is to use the plane for personal flights.

We use a fixed monthly payment to cover the major expenses: loan, annual, property tax, tie down, subscriptions, insurance. Everyone pays for their own fuel, leave the tanks at the tab. We have a $25/hr charge that goes toward the engine overhaul. We also had the startup problem and chose to ignore it but the plane only had 200 hours on it when we bought it.

We don't have a separate account for maintenance, just include an estimate that is included in the monthly payment. There are two bank accounts: one for the regular operating expenses and the second for the engine reserve. I do a monthly report that shows the monthly expenditures and ties to the bank statement.

The issue that we didn't clearly cover was how to value the plane when a partner wanted to leave and when a new partner came in. Toughest issue that is still open is what happens if the value of the plane falls below the outstanding loan value. Does the exiting partner have to pay off his/her share. The only real solution is to sell the plane. So far we've avoided the problem by luck, the value of the plane has remained at or above the loan balance. Of course value is tough to know without selling. We have used independent valuations. The other issue is adding a name to the loan without refinancing. We haven't done it because the loan companies want 20-30% equity which would require us to put more cash in the plane which we didn't want to do. Of course this really simplifies if there is no loan.

Alan

 

[LDJones]

A company-owned plane operates under Part 91. As a general rule, you deal with 135 only if you're offering to haul people for compensation. The reason for the LLC is to protect your assets if your partner spins into a school. If you spin into a school, your estate and the LLC are on the hook.

As for friends, I've been in three partnerships with friends with no problems. The key is a good operating agreement up front. We had a fixed monthly fee for fixed costs, an hourly rate (dry...each covered own fuel) for misc mx and theoretical reserve. Any shortfalls in the mx fund were split evenly.

Only caveat on partnerships in my opinion is stick with 2-3 max. Incremental savings after three aren't worth the additional logistics hassles of dealing with another partner. Plus, upgrade decisions are made much more quickly.

 

[wabower]

Two examples come to mind in support of this theory, both involving co-ownership of a B200 King Air during the past few years. One group used average fuel prices for billing the owners and swagged a few other expenses as well simply because "it's a lot easier, will work out about the same over time and we don't need to slice it quite that fine."

Another group (of which I was a part) calculated the costs to the dime. But one of the co-owners kept the books and did all the admin absolutely perfectly, and accounting was accurate to the penny. I was more than happy to write the checks for my part.

It's all about attitude. Easy going folks that aren't worried about expenses to the absolute penny do fine in a partnership. If you are a my way or the highway kind of guy, not so much. If you pull out a calculator when you go to lunch with a friend, not so much. If you're anal about how the plane must be operated, not so much.

My limited understanding of LLC are that it wound be good in a partnership to protect you if your partner crashes. It won't do you any good if you are flying.

 

[Ventucky Red]

I am not a lawyer but in CA it was strongly recommended that we use an LLC for a partnership. It does protect you from liability issues created by your partners. Does nothing for you.


The issue that we didn't clearly cover was how to value the plane when a partner wanted to leave and when a new partner came in. Toughest issue that is still open is what happens if the value of the plane falls below the outstanding loan value. Does the exiting partner have to pay off his/her share. The only real solution is to sell the plane. So far we've avoided the problem by luck, the value of the plane has remained at or above the loan balance. Of course value is tough to know without selling. We have used independent valuations. The other issue is adding a name to the loan without refinancing. We haven't done it because the loan companies want 20-30% equity which would require us to put more cash in the plane which we didn't want to do. Of course this really simplifies if there is no loan.

Alan

No loan on the plane which is good... I wouldn't enter into a partnership if this was the case...

The issue that is gnawing at me is the mid-time engine, and the money put up is just to buy out the partner as he is looking for a premium due to he wanting to go into another partnership on a bigger better plane..

Only caveat on partnerships in my opinion is stick with 2-3 max. Incremental savings after three aren't worth the additional logistics hassles of dealing with another partner. Plus, upgrade decisions are made much more quickly.

We are discussing this... and the current remaining partner wouldn't mind it being three, but no more..

My limited understanding of LLC are that it wound be good in a partnership to protect you if your partner crashes. It won't do you any good if you are flying.

Actually the way I understand it is they; whomever is going to sue you, can only come after the assets of the LLC... with the exception of pilot error then it is best to have a good insurance policy..

I vehemently disagree!

I have been in two 50/50 partnerships, both with people I know very well.
Both have been fabulous.

I would never go into an airplane partnership with a stranger. I want to know what I'm getting myself into. Partnering up with somebody I've respected for a long time is much safer than rolling the dice on an unknown quantity.

Neither partnership had any agreement in writing, or an LLC. The rules are simple- Each pays his own gas, everything else gets split down the middle.

The End.

Food for thought...thanks.. But as my father always said.."friends are friends, family is family, but business is business... and when it comes to money people get funny!!!"

Please understand I am looking for what is fair... what if I fly the plane 200 hours a year and the other partner only 10.. is it fair to them to pay for 50% of the maintenance?

I am looking to go into this eyes wide open and it being a fair for all and there are not debilitating financial surprises a year or so down the road..

 

[Ateaist]

Actually the way I understand it is they; whomever is going to sue you, can only come after the assets of the LLC... with the exception of pilot error then it is best to have a good insurance policy..

Not really. The LLC is not a magic shield against all liabilities against you, only against those liabilities that are primarily of the LLC. For example, if the plane is financed and you are in default, the lender can only go after the assets of the LLC if the LLC was the borrower - if you signed a personal guaranty or took out the loan in your own name the lender can and will go after you personally. Likewise, if you are negligent as the pilot of the plane and cause injuries to third parties, they can go after you personally for damages (unless you operated the plane as an employee of the LLC in furtherance of its business).

The LLC may have other advantages to you such as tax deductions and/or credits if its sole asset is depreciating over time and costing money to operate and maintain. However, in order to avail yourself of those, the LLC must prepare financial statements determining the losses incurred and depreciation of the asset, and issue a Schedule K-1 to each member at the end of each tax year.

Forming an LLC just for the sake of forming an LLC is just a waste of money - talk to an acountant or tax professional and see if it makes sense for you under these circumstances.

 

[poadeleted20]

I suggest starting by reading through AOPA's excellent guide for multiple ownership.
http://www.aopa.org/members/files/guides/multiple.html

One thing you'll learn there is that a "loose structure" is a legal disaster waiting to happen. Your attorney can explain that in detail, but possibilities include losing everything you own because of something your partner did, or having your share in the airplane tied in a legal knot if your partner dies or gets divorced. Talk to an attorney there in California for more guidance on all this, but you can get some good general guidance from J. Scott Hamilton's "Practical Aviation Law" (4th edition is current, about $40 delivered from various booksellers). Could be the best $40 you ever spend in aviation.

 

[Ken Ibold]

Be careful with the LLC. According to our attorney as soon as you put an airplane in an LLC that has no other function that to hold the plane, the FAA considers it a commercial venture and treats you like a 135 operator.

This is WAY WAY WRONG. Find an attorney who knows how to look up the laws.

 

[gismo]

Be careful with the LLC. According to our attorney as soon as you put an airplane in an LLC that has no other function that to hold the plane, the FAA considers it a commercial venture and treats you like a 135 operator.

I put my plane in an LLC that I already own that is my primary venture.

The FAA doesn't give a hoot how the ownership is structured. If a Cherokee is used to fly passengers "for hire" it falls under part 135, if not it's part 91 regardless of whether it's titled to a corporation, LLC or person. You might be thinking about fractionally owned jets flown by professional crews which do get treated differently than individually owned ones but even then a jet owned by a corp and flown for them can still be part 91.

 

[LDJones]

Please understand I am looking for what is fair... what if I fly the plane 200 hours a year and the other partner only 10.. is it fair to them to pay for 50% of the maintenance?

That's why you need some type of hourly charge towards mx. If/when that fund is exhausted, owners share in the shortfall.

 

[wabower]

Jets and large airplanes are governed by 91.501. It's different than the small-plane rules.

The FAA doesn't give a hoot how the ownership is structured. If a Cherokee is used to fly passengers "for hire" it falls under part 135, if not it's part 91 regardless of whether it's titled to a corporation, LLC or person. You might be thinking about fractionally owned jets flown by professional crews which do get treated differently than individually owned ones but even then a jet owned by a corp and flown for them can still be part 91.

 

[wabower]

Please understand I am looking for what is fair... what if I fly the plane 200 hours a year and the other partner only 10.. is it fair to them to pay for 50% of the maintenance?

I am looking to go into this eyes wide open and it being a fair for all and there are not debilitating financial surprises a year or so down the road..

Some MX is ownership related (can't fly without annual inspection) while some is use related (tire and brake wear.) The co-owners must decide which items fall into which categories.