In our last article we looked at why the FAA considers a corporation or LLC that owns an aircraft to be a flight department company, cannot be operated under Part 91 of the FAR's, and is subject to the more stringent requirements of Parts 119 or 135 certification. Yet common sense tells us that thousands of private aircraft that are used exclusively by their pilot owners are owned in exactly this way --- through a corporation or LLC. That being the case, are the risks to the owner-operator theoretical or real?
The answer is becoming clear: the risks are real. For the last couple of years the FAA has been on a crusade to shut down illegal charters, operations conducted under Part 91 that should be conducted under Parts 119 or 135. The chance that the unwitting Joe Pilot or his closely held My Cool Plane Inc. could get swept up into the FAA enforcement web is real.
If that happens, what is the downside? Are we talking about a bureaucratic slap on the wrist or something worse? Here are the possibilities. I think they are worse; you, my readers, can decide for yourselves.
First, if a flight department company uses its aircraft to transport either members or guests without the appropriate air carrier certificate, they are subject to a civil penalty action. A corporation (and remember, for our purposes that includes an LLC) that operates an aircraft commercially without a commercial certificate is subject to civil penalties of up to $25,000.00 per violation. Per violation means per flight. Think about how you fly and do the math.
Second, if a flight department company uses an aircraft to transport members or guests without the appropriate certificate, this could subject both the owner (i.e., the company) and the pilot to FAA enforcement action.
Third, the flight department company may face cancellation of its aircraft insurance. This is so because some policies exclude coverage when the aircraft is used for commercial purposes. There are a number of reported decisions giving concrete foundation to this particular risk.
Fourth, if a flight department company aircraft is used in violation of Part 119, and a lawsuit ensues, it could result in enhanced tort liability and even punitive damages.
Fifth, in a development that runs completely counter to the owner-operator's desire to shield himself from personal liability by putting ownership of his aircraft into a corporation, violation of the regulation could allow a plaintiff to “pierce the corporate veil.” By doing so, a plaintiff could bypass the liability protection of the corporation and attack the personal assets of the owner-operator.
Sixth, there are tax ramifications as well, and could subject a flight department company's flight operations to federal excise tax. The FAA is explicit about this in its publications on the subject.
In short, there is a whole lot of trouble that can spring from the ownership of a personal-use aircraft through a business entity. The question becomes whether there is a way around this problem. That is the subject of Part 3 of this series.
