Partnerships

[tonycondon]

Well, there is a chance I might go for a partnership. Found another CFI in town who would be interested. Would be a 2 or 3 way deal. What are the benefits of going with an LLC or similar vs. listing our names individually on the registration? Any other considerations from an ownership standpoint? I understand issues to deal with from the operational side, as far as deciding how costs get split up, scheduling, etc.

 

[steingar]

LLC protects your estate if a partner augurs in.

 

[Dean]

One of the big ones is each partner owns shares of the LLC, which owns the airplane. if you need to sell or buy another out, you purchase the shares. If you want to add a partner, he/she purchases shares of the LLC. The LLC provides SOME protection if one of the partners screw up and causes damage or injury to another person,plane etc. Most everyone I know that is in a partnership has it in an LLC.

 

[Ken Ibold]

One of the big ones is each partner owns shares of the LLC, which owns the airplane. if you need to sell or buy another out, you purchase the shares. If you want to add a partner, he/she purchases shares of the LLC. The LLC provides SOME protection if one of the partners screw up and causes damage or injury to another person,plane etc. Most everyone I know that is in a partnership has it in an LLC.

To add a little detail ... in an LLC you depreciate the aircraft so that each partner gets a tax break for the first few years. If someone sells out or you add another partner, the ownership change does not trigger a sales tax event or registration. However, if you depreciate then when the LLC sells the airplane you may have to pay a capital gains tax.

An LLC will require filing a tax return for the corporation (and adding yet another form to your personal tax return). You will likely need to file an "annual report" with the state in which you incorporate. Other state filing fees may apply. If you have a partnership, you really ought to have a business checking account and maintain a maintenance reserve. Business checking accounts typically have a monthly fee.

If you decide on a partnership, look at the numbers. The first partner cuts your cost by 50 percent, and you have a 50-50 chance of a schedule conflict. The second partner only cuts your cost by another 1/6th, yet it increases the potential for a schedule conflict to a 2-in-3 chance. In my experience, a 2 person partnership is ideal, unless you can find a 3rd partner who never wants to use the aircraft.

 

[Dave Siciliano]

We have our Baron in an LLC and did if to insulate for partner liability as much as practical. One does not have to depreciate the plane if it's in an LLC. You can also change the ownership among partners if that become appropriate. On the other side, some states and cities take the position if it's owned in an corporate entity, it's for business use and will try to tax the value. You have to prove it's not business use (if it isn't and the taxing authority can make that an uphill battle.

Your insurance may be different than if the plane is owned outright (although a waiver can fix that). I was insured to fly other aircraft on my personal policy. In the LLC, my partner and I are only insured flying the Baron: no coverage for flying other aircraft.

In any partnership; do a buy/sell agreement. If you part company and are all in agreement, it won't be necessary. But, if things don't go well, have a manner in which you can get out in writing. Best to agree upon that while everyone is enthusiastic about getting in.

Oh, in addition to a pre-buy, a new partner will have to evaluate the business entity which can add a bit of complexity.

Best,

Dave

 

[poadeleted20]

What are the benefits of going with an LLC or similar vs. listing our names individually on the registration?

The principal benefit of an LLC is to provide protection of the personal assets of the other members from the negligence of the other member. However, it does not provide protection for your own negligence. Thus, if one of the members does something silly and crashes the plane into a schoolbus, the other members' financial liability is limited to their stake in the LLC. OTOH, if one of the members does an oil change and doesn't properly torque the filter, and another member has an accident as a result, the member who did the oil change can still lose everything s/he owns, but as above, the non-negligent third and other members' assets (excluding their stake in the LLC) are protected.

The other benefits include the ability to ensure that the successors of one of the part-owners cannot create problems for the other part-owners, although this requires a carefully crafted agreement for the LLC members. An example of this is a case Wayne mentioned in which one partner in a partnership got divorced, and his ex-wife won the share of the plane in the settlement. She made life miserable for the other partners thereafter. That's harder to do with an LLC in which transfer of shares can be controlled more easily.

Any other considerations from an ownership standpoint? I understand issues to deal with from the operational side, as far as deciding how costs get split up, scheduling, etc.

Make sure the LLC agreement is crafted by an attorney familiar with aircraft ownership LLC's so that all issues are covered and done so in a way that will hold up in a court in the state in which the LLC is formed.

 

[wabower]

Tony,

Look hard at forming your own single-member LLC that will then buy an undivided interest in the airplane as a co-owner.

That technique allows you to control your business/personal use of the plane, without regard to how the other co-owners want to handle their part. If you form an LLC with no employees (as with most airplane deals) you will use your existing SSN for the tax ID and just fold any tax reporting into your individual return. No separate set of books or any of that crap.

I have used this technique for our King Air, as well as ~50 other multiple-owner transactions over the past year or so, all with good success. The attorneys who worked the paper for the buyers are all well-known aviation lawyers, all concur with the strategy. It makes getting in even easier, and really simplifies getting out, which can otherwise be a *****.

You'll need to write an operating agreement with your co-owners, but you'll need that anyway. Be aware that writing the sell-out and dissolution language is at least as important as definining the buy-in and operating language, maybe more. Too often the attitude is "we'll deal with that issue when the time comes". That's not a good idea.

 

[CJones]

Since there are (at least) 2 CFI's involved in this undertaking, I wonder if there are any special wordings that should be included in the agreement in case the plane has the opportunity to be used for instruction. Would this fall under 'business use' for the LLC? If so, would that have tax implications - pro or con - or insurance implications for the LLC? If one person usew the plane for instruction more than the other, how is the difference in insurance divided among the LLC members/owners?

 

[Ted]

Biggest disadvantage to any sort of partnership is that if you get a bad partner (bad basically meaning someone who wants to do things you don't, or vice versa) it can be annoying. I'd be careful who I partnered with, and that's part of the reason why I have no intentions of partnering in the Aztec.

Another option that gives you similar benefits in terms of income from the plane is to find a few people (emphasis on few) to rent the plane from you, similar to the arrangement I have in the Mooney. This gives you complete control over what happens with the plane and that's never in question, but lets other people help pay your expenses. I really like doing things this way. As a renter, I get a good deal on a plane that I know exactly who flies and how they fly it that has better availability than a standard rental aircraft, plus the plane is nicer. As a rentee, it means getting income without giving up your sovereignty, so to speak.

If others are flying the plane, an LLC is a good idea. That's how the Mooney is set up.

 

[Areeda]

Since there are (at least) 2 CFI's involved in this undertaking, I wonder if there are any special wordings that should be included in the agreement in case the plane has the opportunity to be used for instruction. Would this fall under 'business use' for the LLC? If so, would that have tax implications - pro or con - or insurance implications for the LLC? If one person usew the plane for instruction more than the other, how is the difference in insurance divided among the LLC members/owners?

Good points Chris.

The biggest thing is to discuss this kind of stuff before writing the check.

We looked into this for our Cirrus. It seems possible to have 2 insurance policies on an airplane. One that covers instruction and one that covers personal/business use. The reason we considered this is we could only get 1M/100K for instruction while we have 2M smooth for the other.

In our partnership we consider insurance a fixed cost like most others (costs not partnerships) so we divide it equally. The idea being if no one flies at all we still need the insurance.

The fuel is the responsibility of the pilot and we have an engine reserve and maintenance reserve which are the only per hour charges.

Oh yeah, we have the plane in an LLC for the reasons mentioned above. Although California will tax the sale of a share, other states may not have their hands so deep in your pockets.

Joe

 

[jason]

Also, keep in mind that you'll likely want to avoid using the airplane as collateral for financing. That means that all members will need to show up with the capital for the aircraft in hand (how they secure it is up to them).

 

[tonycondon]

Also, keep in mind that you'll likely want to avoid using the airplane as collateral for financing. That means that all members will need to show up with the capital for the aircraft in hand (how they secure it is up to them).

of course. one of the main advantages for me to doing a partnership is that i could just empty out my savings account instead of getting a loan.

 

[James_Dean]

Also, keep in mind that you'll likely want to avoid using the airplane as collateral for financing. That means that all members will need to show up with the capital for the aircraft in hand (how they secure it is up to them).

Umm... Why? I've used PG's for this numerous times.

Eggman

 

[jason]

Umm... Why? I've used PG's for this numerous times.

Eggman

You have assets with which to guarantee the loan. I was specifically warning against allowing any member in the partnership to attach the aircraft as collateral on their part of the financing. Why would someone want to enter into a partnership with somebody that couldn't bring all of the required capital to the purchase? The other guy gets behind on his payments and I watch my airplane go bye bye. No thanks.

 

[James_Dean]

You have assets with which to guarantee the loan. I was specifically warning against allowing any member in the partnership to attach the aircraft as collateral on their part of the financing. Why would someone want to enter into a partnership with somebody that couldn't bring all of the required capital to the purchase? The other guy gets behind on his payments and I watch my airplane go bye bye. No thanks.

Ramsey has made you too afraid of OPM.

Much easier to handle in partnership agreements which should be considered mandatory in any endeavor such as this. Partner that doesn't make payments gets super diluted. You only bear the risk of having to make the third partner's payment, however that partner will risk losing equity.

Get a lawyer and take your chances. I know that Dave Ramsey hates debt, but there is such a thing as good debt.

Eggman

 

[wabower]

Don't buy as a partner. Of anything. Ever. Co-ownership and other methods are much better.

Banks will write some loans without requiring joint and several liability. That's not to say they will write all of them that way.

Ramsey has made you too afraid of OPM.

Much easier to handle in partnership agreements which should be considered mandatory in any endeavor such as this. Partner that doesn't make payments gets super diluted. You only bear the risk of having to make the third partner's payment, however that partner will risk losing equity.

Get a lawyer and take your chances. I know that Dave Ramsey hates debt, but there is such a thing as good debt.

Eggman

 

[jason]

Ramsey has made you too afraid of OPM.

I didn't mention Dave Ramsey, nor have I told Tony not to finance his aircraft purchase. You're reading words that were never written in this thread because you know my financial philosophy.

I generally don't use debt as a tool in my life and in avoiding it I've found that I'm much happier. Tony's a big boy. I'm not pushing my beliefs on him unless he asks for my opinion.

Much easier to handle in partnership agreements which should be considered mandatory in any endeavor such as this. Partner that doesn't make payments gets super diluted. You only bear the risk of having to make the third partner's payment, however that partner will risk losing equity.

Why bother? Find another partner.

I agree that partnership agreements are mandatory, but if somebody can't secure financing without the aircraft on the hook should they really be in the deal in the first place? I can't imagine needing a toy bad enough to allow myself to get into a partnership where somebody else not making their payments allows my stuff to be taken away. If he can't get a HELOC or similar without putting the plane on the line, how is he going to pay his share of the engine rebuild when it throws a rod?

Get a lawyer and take your chances. I know that Dave Ramsey hates debt, but there is such a thing as good debt.

Eggman

Not for me.

 

[James_Dean]

I didn't mention Dave Ramsey, nor have I told Tony not to finance his aircraft purchase. You're reading words that were never written in this thread because you know my financial philosophy.

I generally don't use debt as a tool in my life and in avoiding it I've found that I'm much happier. Tony's a big boy. I'm not pushing my beliefs on him unless he asks for my opinion.



Why bother? Find another partner.

I agree that partnership agreements are mandatory, but if somebody can't secure financing without the aircraft on the hook should they really be in the deal in the first place? I can't imagine needing a toy bad enough to allow myself to get into a partnership where somebody else not making their payments allows my stuff to be taken away. If he can't get a HELOC or similar without putting the plane on the line, how is he going to pay his share of the engine rebuild when it throws a rod?



Not for me.

Jason,

Just a little friendly jousting, I wasn't trying to attack. I'm much more comfortable with debt than most, and feel that it is an essential part of business and growth.

I agree that all the partners should be able to afford their end of the deal. I just disagree with the concept of not using the plane as collateral on the note used to purchase it.

J.T.

 

[jason]

Jason,

Just a little friendly jousting, I wasn't trying to attack. I'm much more comfortable with debt than most, and feel that it is an essential part of business and growth.

I agree that all the partners should be able to afford their end of the deal. I just disagree with the concept of not using the plane as collateral on the note used to purchase it.

J.T.

Of course. As has been the case any time we've hit on the topic of financing...we'll have to agree to disagree. That doesn't mean that I won't take a ride in your airplane if it's offered.

As long as you have money in your pocket when we sit down at the poker table at Gaston's...we'll be fine.

 

[James_Dean]

As long as you have money in your pocket when we sit down at the poker table at Gaston's...we'll be fine.

Will you accept shares of Citibank purchased on margin?

 

[wby0nder]

I love the notion of Tony's "Estate". HE is his estate! His knowledge, his friends, his skills. He is a rich man and nobody can take that away.

 

[SCCutler]

I love the notion of Tony's "Estate". HE is his estate! His knowledge, his friends, his skills. He is a rich man and nobody can take that away.

Truer words were never written, Matt.

Thanks for giving this perspective.

 

[AdamZ]

Tony, spend a few bucks to speak with an attorney in the state where you are going to have the plane. The laws of every state are different with regard to what is and what is not protected in various forms of ownership and even what types of ownership are available. In PA for example we can have a corporation, a limited liabilty corporation (LLC) Partnership and multiple ownership.

The board is a great place to get started but don't assume that what will work in PA or TX or CA will work for you in KS. In addition to liability issues the tax issues at the state level will also vary.

A person that does corporate work should be able to help you with everything.

 

[tonycondon]

you bet Adam. I've got the number for a local aviation attorney if I need it.

 

[Ken Ibold]

I can't imagine needing a toy bad enough to allow myself to get into a partnership where somebody else not making their payments allows my stuff to be taken away. If he can't get a HELOC or similar without putting the plane on the line, how is he going to pay his share of the engine rebuild when it throws a rod?

That's a pretty broad brush you're painting with. Obviously that can happen, but I can think of a number of reasons why people of means would take out a loan for an airplane. In both of the partnerships I was in, I paid my share in cash and my partners borrowed the money. I reasoned that if they get into trouble three years down the road, I'm happy to take their share, pay off their debt, and have the airplane to myself. But in both cases my partners were affluent gentlemen who made far more money than I did. It just fit their personal financial situation and preferences to have a loan. I allowed the airplane to serve as collateral. But then, I had a legal document (written by my wife) that gave me ironclad protection.

Like anything else, the devil is in the details.

 

[wabower]

For openers, business interest expense can be deductible, personal interest expense is not. Depending on the co-owner's usage, the choice of own vs. loan could be significant. One more reason you don't want to use co-ownership rather than partnership or corporate structure.

That's a pretty broad brush you're painting with. Obviously that can happen, but I can think of a number of reasons why people of means would take out a loan for an airplane. In both of the partnerships I was in, I paid my share in cash and my partners borrowed the money. I reasoned that if they get into trouble three years down the road, I'm happy to take their share, pay off their debt, and have the airplane to myself. But in both cases my partners were affluent gentlemen who made far more money than I did. It just fit their personal financial situation and preferences to have a loan. I allowed the airplane to serve as collateral. But then, I had a legal document (written by my wife) that gave me ironclad protection.

Like anything else, the devil is in the details.