Setting up co-ownership ?'s

badtransam97

badtransam97

Well-Known Member
Hope to clear up some confusion here. I have looked at AOPA and other sites and seem to be more confused than when I started!
Heres the deal: Have a guy on the local field who wants to set up a co-ownership of a 150, and he is thinking about a max of 8 people. My concern is, what is the best route to take when setting this up? As far as liability, taxes, etc go? We had thought $2000 initial buy in, with $30/month dues, and then approx $40/hr flight time.
I first thought LLC was the way to go for liability protection, but was reading that the FAA might consider it a pt135 operation somehow since we take in money for flight time and monthly dues?? Then I thought, well just a simple co-ownership with all 8 names on the registration, and a joint bank acct, but then where does that leave us on liability from each other having an incident and losing our personal assest?
Any help or advice is greatly appreciatied! Just want the best setup for us that will be LEGAL, and provide trhe most liabilty protection, and hopefully cheapest and easiest to manage on taxes.
Thanks!!
 
Sort out the finances first. Let's look at the numbers. Let's buy a mid-time 152 for $24k. Let's plan for an $18k engine overhaul, so let's initially fund the maintenance account at $9k. So, we are at $4125 each, to start. Right off the bat, your planning is suspect. The agreement should require an immediate cash call if maintenance fund can't cover an overhaul. If you can't make the cash call in three months, you forfeit your share. Likewise, the maintenance fund should always be at the 50% level. The maintenance fund should be aggressively funded at a per/hour rate. If the fund becomes over-funded, the excess can be used for optional upgrades. Most partnerships fail when hit with major maintenance or an overhaul. Plan for the worst and your partnership can survive.

Beyond that, find a lawyer in your state with experience setting up an aircraft partnership. Include the maintenance terms suggested, or something close. With a 152 or 172, insurance won't be a problem.

Question the motives of the aircraft owner you mentioned. You want eight financially responsible partners. So, he wants to sell his 152 for $16k? I haven't seen too many $16k 152s that I'd be excited about. Is this a desperate owner that can't afford his plane and is looking at an approaching overhaul?
 
Setting yourself up as a 501(c)7 non-profit club seems to be the easiest way. Insurance-wise, most underwriters want no more than four named individuals for a private policy. Above that, they treat you like a club or flight school.

If you don't already have an excel sheet that shows your fixed costs and your expected variable costs as a function of how much y'all fly, then you're way behind.
 
hook_dupin said:
If you don't already have an excel sheet that shows your fixed costs and your expected variable costs as a function of how much y'all fly, then you're way behind.
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A successful partnership needs a plan that addresses a blown engine on day one. Too many plans are wildly optimistic and many partnerships have grounded planes requiring maintenance.
 
Pilot Fighter said:
A successful partnership needs a plan that addresses a blown engine on day one. Too many plans are wildly optimistic and many partnerships have grounded planes requiring maintenance.
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True enough. A simple statement like "Unexpected maintenance costs will be shared among the members such that each member's contribution will be proportional to his interest in (name of LLC)" in the Operating Agreement should suffice. Membership need not fund the "Oh crap!" fund upfront if there's a solid plan in place and everyone agrees to it.

You could also put in some sort of default clause like "If a member is unable to fund his share of any debt to (name of LLC) within 30 days, then he will relinquish his share of (name here) at no cost to (name) or its remaining members" to cover the case where a guy won't cough up the cash for an overhaul.
 
hook_dupin said:
True enough. A simple statement like "Unexpected maintenance costs will be shared among the members such that each member's contribution will be proportional to his interest in (name of LLC)" in the Operating Agreement should suffice. Membership need not fund the "Oh crap!" fund upfront if there's a solid plan in place and everyone agrees to it.
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Most agreements have such language yet aircraft find themselves grounded when they need an engine. A solid plan, in my mind, means cash in the bank. If 8 guys can't fund a maintenance account with $9k, they can't afford to own a plane.

Most partnerships are overly optimistic. Most consist of folks that can't really afford their hobby. By year two, half the partnership isn't flying the hours they planned. One partner moved away and is just paying dues. Another partner is unemployed. Another partner is getting a divorce. Nobody wants to kick Joe out of the partnership, he's Bill's best friend and John's brother-in-law. Nobody wants to deal with the conflict so the plane sits.
 
Pilot Fighter said:
Most partnerships are overly optimistic. Most consist of folks that can't really afford their hobby. By year two, half the partnership isn't flying the hours they planned. One partner moved away and is just paying dues. Another partner is unemployed. Another partner is getting a divorce. Nobody wants to kick Joe out of the partnership, he's Bill's best friend and John's brother-in-law. Nobody wants to deal with the conflict so the plane sits.
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I see that as a leadership / management issue and not necassarily an up-front funding issue. By definition, a partnership is a company...People have to lead that company. If nobody wants to drive the ship, then it will probably end up stuck on a reef somewhere. I see it all the time in my real job now: nobody wants to be the bad guy, so folks shy away from making decisions. As long as the company has a) a firm decision making process and b) a methodology for members to escape, then it can work. You're right, though...a solid plan means cash in the bank. I'd rather it be my bank where I have control (and earning capability!) than the bank of the LLC.

For the OP, another way to solve the problem is to have your circle of folks form a non-profit club. The club then leases from the original owner. Most of the financial risk and rewards are then placed back on the owner. This is how I set up my flying club.

Of course, it may be that the owner is broke, and is trying to find a way to collect a pile of cash for an overhaul. The partnership idea interests him because it lets him keep the airplane (as opposed to selling it for a pitance). Be aware: he may not be iterested in "vocal" partners.
 
hook_dupin said:
You're right, though...a solid plan means cash in the bank. I'd rather it be my bank where I have control (and earning capability!) than the bank of the LLC.
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Good leadership doesn't put money in the banks of your partners when there is an unanticipated expense. I've seen many partnerships go to hell over money. Consider eight of your friends. Of that eight, how many can afford to write a check for more than two grand, today?

If I'm in a partnership, I want to fly, uninterrupted, in a well maintained plane. Many small businesses fail because they are undercapitalized. Why would you want to be a partner in an undercapitalized business?

I want to be in a partnership that shares my philosophy.
 
Does section 501(c)(7) provide a corporate veil protecting members from individual liability? That would be my greatest concern - even before money - because my relatively small investment could turn into a multi-million dollar joint & several liability if someone is killed in the airplane and the veil is penetrated.
 
tomokc said:
Does section 501(c)(7) provide a corporate veil protecting members from individual liability? That would be my greatest concern - even before money - because my relatively small investment could turn into a multi-million dollar joint & several liability if someone is killed in the airplane and the veil is penetrated.
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The only liability a corporate veil protects you against is defaulting on money owed. It won't protect you against lawsuits from a plane crash. You need good insurance. Period.
 
tomokc said:
Does section 501(c)(7) provide a corporate veil protecting members from individual liability? That would be my greatest concern - even before money - because my relatively small investment could turn into a multi-million dollar joint & several liability if someone is killed in the airplane and the veil is penetrated.
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Talk to an attorney. These days, insurance is the primary protection as the veil isn't as opaque as it use to be.
 
mojo6911 said:
The only liability a corporate veil protects you against is defaulting on money owed. It won't protect you against lawsuits from a plane crash. You need good insurance. Period.
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The corporate veil protects individual shareholders/members against claims against the company except in cases where torts and willful negligence by the owners can be proven.
 
Yes,
tomokc said:
The corporate veil protects individual shareholders/members against claims against the company except in cases where torts and willful negligence by the owners can be proven.
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And in cases of property loss, injury, or death, you can expect the adversaries to go after everybody claiming negligence and tortuous action. These issues are well understood by insurance companies and attorneys and both should be consulted.
 
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