All the business on incorporation
There are a lot of ways to own an airplane, as should be obvious by the scope of our special coverage in this issue. And while simple individual ownership or partnerships are the most common ways to hold title to an airplane, there are alternatives. As discussed in "Buying Experience: Second Mortgage Pays for Piper" on page 79, you may be able to place the airplane in a limited liability partnership, which offers the owners some measure of protection from liability. And there's another route: incorporation.
Basically, corporate ownership of an airplane has one main advantage — it shields the principals from liability. It's not a totally impenetrable shield, as experts in the field admit, and lawsuits continue to try to pierce the veil of incorporation to claim the assets of the shareholders. So it comes down to a basic question: Are you wealthy enough to make a good target? If your airplane lands upside down in somebody's lawn shed, are you or your family likely to be sued for damages, mainly because of the loot to be had?
If you answer "yes" to these questions, then it's possible that incorporation can be of assistance. It works like this: You set up a company to run the airplane. You can be the sole shareholder, CEO, and only employee. The company is responsible for maintaining the airplane and paying for expenses incurred in its operation. Similarly, you are expected to pay the corporation for use of the airplane.
Sound like a sneaky way of having your airplane but protecting your holdings? Not so fast. It's important to understand that both the feds and state governments frown upon shoddily run corporations, regardless of size. You must be extremely careful in structuring the corporation and be certain that the entity has its own books — including credit cards and bank accounts — separate from your own. You must also abide by the myriad other legal and procedural requirements of a corporation, including shareholder meetings and payment of incorporation fees. You may also be required to file quarterly estimated taxes.
Other tax considerations can make the corporation look good or bad, depending upon how likely the endeavor is to make money. Take, for instance, a situation in which the operation of the airplane nets a profit. In this case, it's possible that the basic corporate tax is higher than your own personal tax rate, and you'll pay more in the corporate role. If, however, you are in the uppermost tax brackets, it's possible that the airplane's profits will be taxed at a lower rate through the corporation. Conversely, if the airplane loses money, under a normal corporate umbrella, it would not be possible for you to post those losses against your own taxable income.
The exception is by incorporating under Subchapter S of the Internal Revenue Code. This is a far more flexible type of incorporation that allows tax advantages; mainly the Sub S corporation allows the shareholders to be taxed as though in a partnership, rather than in the sometimes-higher corporate tax bracket. Think of this as a midway point between a corporation and a personally owned, business-use arrangement.
If you keep the airplane for a time and sell it at a large profit, you may find some advantage in the corporation. Instead of the usual capital gains tax that you'd face as a private or partnership owner, it may be possible to defer paying the tax through the corporation by the installment sale method. How much of a benefit this is obviously depends upon your personal wealth and the value of the airplane in question.
In any event, the ins and outs of incorporation are too complex for real do-it-yourself instruction. It's excellent advice to seek counsel before making the final decision on incorporation for your airplane purchase. Corporate rules vary by state, and it's in your best interests to have a local expert do the legwork for you. Besides, wouldn't you rather be flying?
