Incorporating for Freelance Instruction?

[centralhome]

I was just curious if anyone that freelance instructs has got incorporated. Just wondering in case something bad was to happen(student accident or something), if it would be a good idea to do it to protect yourself and you're personal belongings in case of a lawsuit.
If anyone has done it, how complicated is it, and what did it cost?

Thanks for any replies!

 

[tgrayson]

Just wondering in case something bad was to happen(student accident or something), if it would be a good idea to do it to protect yourself and you're personal belongings in case of a lawsuit.
If anyone has done it, how complicated is it, and what did it cost?

Creating an LLC is very easy in most (all?) states. The fees vary a lot, but may be as low as $25. Filling out a form may be all that's required; some states require that you have an operating agreement of some sort. Your state probably has a website with the forms and requirements.

LLC's are held to be superior to an actual "inc" designation because the regulatory burdens are smaller. From my understanding, lawsuits were sometimes were allowed to "pierce the corporate veil" when the person running the company didn't actually run it like a company. LLC's also allow pass through taxation; any income is solely taxed in your 1040.

How much protection this would offer you, I don't know.

 

[mjg407]

I have talked with my CPA on this very subject, and at least in CA, his impression that it didn't really give that much protection, add to that the IRS really starts looking at these LLC because people are attempting to set up their aircraft as a LLC, name themselves the Chief Pilot, and proceede to right off all of their flights.

Ever heard of that 800 lb gorilla.....

 

[MidlifeFlyer]

Just wondering in case something bad was to happen(student accident or something), if it would be a good idea to do it to protect yourself and you're personal belongings in case of a lawsuit.

In terms of liability protection in case of a student accident or something, a corporation, LLC or any other from of entity that provides limited liability protection will not protect you or your assets even a teeny weenie bit.

This is easily the single most misunderstood concept by people about these entities. Aside from tax benefits (that I know zero about), these entities are designed to give you (a) protection from personal liability for contracts that the company makes and (b) protection from what a partner or employee might do on behalf of the company (so if you and someone else go into the training business together, the LLC will generally protect you from liability for each other's accidents).

But none of these entities will protect you from liability for your actions that result in damage or injury (and this part has nothing to do with "piercing the corporate veil").

 

[Blackhawk]

I spoke with an honest lawyer who pretty much reiterated what Mark wrote. The only thing to add; he said the only benefit for me would be if I rented out my airplane to other instructors (not happening). In such a situation- another pilot teaching in your airplane and having an accident- an LLC could provide protection as it would meet the "walks and talks like a duck" test. This is why most flight schools will set up their airplanes in LLCs. But if you think an LLC on paper will protect what is essentially a sole proprietorship with no other assets, you are mistaken. Spend the money on insurance.
I am not a lawyer.

 

[MidlifeFlyer]

I spoke with an honest lawyer who pretty much reiterated what Mark wrote.

You mean there are 2 of us???!!!

 

[woutlaw]

My experience from talking to lawyer pals exactly.

There may be tax advantages, but in terms of liability protection, a corporation built around a single individual offers no more protection than a sole proprietorship. In effect, you are the corporation, and should something bad happen your butt is on the line.

Insurance is your friend, as is good record keeping and high standards of training.

I spoke with an honest lawyer who pretty much reiterated what Mark wrote. The only thing to add; he said the only benefit for me would be if I rented out my airplane to other instructors (not happening). In such a situation- another pilot teaching in your airplane and having an accident- an LLC could provide protection as it would meet the "walks and talks like a duck" test. This is why most flight schools will set up their airplanes in LLCs. But if you think an LLC on paper will protect what is essentially a sole proprietorship with no other assets, you are mistaken. Spend the money on insurance.
I am not a lawyer.

 

[Nihon_Ni]

The reason a LLC won't protect you from liability in this situation is because you are using a CFI certificate issued in your name. Your LLC isn't the CFI, you are. Even if you are employed by your LLC, you are still personally responsible for your actions. You may be able to shelter your assets in a corporation/trust making you a less likely target for a suit (if all your assets & income are sheltered there's little chance of a judgment getting paid) but it won't reduce your laibility.

 

[centralhome]

Thanks for the replies. What kind of insurance do you instructors carry and the amounts of it if you do not mind discussing. Do you carry a policy that will cover the value of the airplane and property damages? Is there one policy you can get to cover you in multiple airplanes? And what do the rates run. Will insurance help you if something happened with a student and a lawsuit was filed?
I was covered by the flying club I was instructing at, but they closed down and I am doing it freelance right now and deciding exactly what kind of coverage I need.
I am currently instructing in 6 different owner's airplanes(Cherokee 180, Cherokee Six, Cherokee 140, Piper Arrow, Cessna 172, Commander).

Thanks for any help ya'll can give me

 

[CoffeeIcePapers]

Thanks for the replies. What kind of insurance do you instructors carry and the amounts of it if you do not mind discussing. Do you carry a policy that will cover the value of the airplane and property damages? Is there one policy you can get to cover you in multiple airplanes? And what do the rates run. Will insurance help you if something happened with a student and a lawsuit was filed?
I was covered by the flying club I was instructing at, but they closed down and I am doing it freelance right now and deciding exactly what kind of coverage I need.
I am currently instructing in 6 different owner's airplanes(Cherokee 180, Cherokee Six, Cherokee 140, Piper Arrow, Cessna 172, Commander).

Thanks for any help ya'll can give me

Some people would argue it is better to NOT have insurance if you don't have any assets. I'm not sure if this is good advice or not. My company provided me with 10k insurance (to cover the deductable), that also covers me if I fly any other non-owned aircraft, including multi-engine. It was around $200 from Avemco. Not sure if they will cover me in a lawsuit.

You could always get general business liability insurance, that usually will cover you in a lawsuit.

 

[MidlifeFlyer]

Thanks for the replies. What kind of insurance do you instructors carry and the amounts of it if you do not mind discussing.

CFI insurance is available from a number of places including AVEMCO, the AOPA agency, and Falcon Insurance, which handles the plan for NAFI.

CFI insurance is almost identical to non-owned aircraft (aka "renter" insurance), but with a rider that also covers negligence as an instructor. It covers you in multiple aircraft. You buy enough hull insurance to cover what you think your exposure will be for damage to the airplane itself and enough liability to cover injuries to people and property other than the airplane.

 

[Minnesota_Flyer]

You mean there are 2 of us???!!!

at least 3

 

[woutlaw]

I got mine through AOPA. https://www.aopaia.com/cfi_insurance.cfm

You can get a quote online in about 5 minutes.

I forget the coverage amounts, but I think I chose an amount higher than my (and my wife's) net worth. They do offer "professional malpractice" or something as well.

As for airplane value, the flight school I contract with required $5,000, which would cover their insurance deductible. I picked something higher than that because I was also doing freelance instruction in Bonanzas, Cirrus' and some other high-buck airplanes that could eat up $25 grand in a hurry just running off a runway.

Cost about $320 my first year with no dual given and dropped to maybe $250 or so at my renewal with maybe 500 hours dual given.

Falcon, I believe, offers something similar through the National Association of Flight Instructors (www.nafinet.org).

Some instructors require owner clients to produce a waive of subrogation, which is basically a "I won't sue you, Mr. CFI, if something goes wrong and neither will my insurance company" (technically, I think they get the waiver from the insurance company but I don't know for certain how it works exactly.) I have no idea how effective such an avenue is.

Thanks for the replies. What kind of insurance do you instructors carry and the amounts of it if you do not mind discussing. Do you carry a policy that will cover the value of the airplane and property damages? Is there one policy you can get to cover you in multiple airplanes? And what do the rates run. Will insurance help you if something happened with a student and a lawsuit was filed?
I was covered by the flying club I was instructing at, but they closed down and I am doing it freelance right now and deciding exactly what kind of coverage I need.
I am currently instructing in 6 different owner's airplanes(Cherokee 180, Cherokee Six, Cherokee 140, Piper Arrow, Cessna 172, Commander).

Thanks for any help ya'll can give me

 

[slushie]

I was thinking about an LLC for myself, but I also have aspirations to make it more than just myself as a contract pilot/instructor. For what it's worth, you can still write off the same stuff whether you are an LLC or a Sole Proprietor. And if what everyone is saying here is true, then the LLC provides no real benefit other than a possible boost to business image (with customers and vendors).

 

[MidlifeFlyer]

I was thinking about an LLC for myself, but I also have aspirations to make it more than just myself as a contract pilot/instructor. For what it's worth, you can still write off the same stuff whether you are an LLC or a Sole Proprietor. And if what everyone is saying here is true, then the LLC provides no real benefit other than a possible boost to business image (with customers and vendors).

Two good points. There is sometimes a non-legal, non-tax image benefit when you are a "company" rather than just you. I'm "just me" but when my business card says "Midlife Flight" people assume there is more to it.

On the "legal" end, if you have aspirations for it to me more than just you, at that point there usually is some liability benefit. Also, the fact that the LLC does not protect you from your own "torts" does not mean that the LLC doesn't provide you with some "contract" liability protection which may mean more in the contract pilot situation than in the CFI one.

That's a lot of "usually" and "may". If you're looking for a solid answer that applies to you and your situation, see your attorney.

 

[slushie]

Well, I have the DBA/FFN set up, Washington Mutual bears an account under that name, and as soon as I'm done being broke, I'll set up the LLC just for the sake of getting it started.

 

[slushie]

[...]the LLC does not protect you from your own "torts" [...]

Wait...what about Vicarious Liability?anic:

 

[MidlifeFlyer]

Wait...what about Vicarious Liability?anic:

What about it?

Vicarious liability means that the company is =also= responsible for what the employee does. It does not mean that the employee is not responsible for what he does.

 

[slushie]

What about it?

Vicarious liability means that the company is =also= responsible for what the employee does. It does not mean that the employee is not responsible for what he does.

I see.

 

[EnnisLynch]

Liability for C and S corp's are limited to the shareholders investment in the company.

The general advantage is the ability to deduct legitimate expenses. If you are good at record keeping you will save a lot with an S-Corp so long as you have sufficient income from the company to pay for all expenses. There is a limit to the amount of losses you can claim on your personal tax return per year.

If you are going to run your instruction as a true business and not a hobby there is no question, you must incorporate (well, ok, you don't have to but you would be silly not too). After years of running my consulting business as a sole proprietership I finally bit the bullet and incorporated, I have not regretted it. Things are so much easier now.