Flyer Beware –Operating an Aircraft with a Sole-Purpose Company

May 2016

Owning an aircraft can be highly beneficial to a business and its owners. Having the flexibility to quickly and efficiently visit clients and attend meetings across the country is just one of the many reasons that an aircraft can be a smart investment. There is, however, a very basic rule about aircraft operation that many aircraft owners and operators ignore or are unaware of.

Aircraft-Only Company Can be an FAA-Regulated "Flight Department Company"

Many business aircraft are owned through a limited liability company – or corporation or other form of organization – that has no other significant assets and no other business activities. A company whose sole asset is an aircraft and whose sole activity is flying (or "operating") that aircraft is known as a "flight department company," and the Federal Aviation Administration (FAA) views a flight department company as operating a commercial air charter service subject to regulation as such (and not under the more flexible general aviation rules). It doesn't matter that the flight department company is providing services only to its parent and affiliated companies. An unlicensed air charter operation violates FAA rules and can subject owners and management, including pilots, to FAA enforcement actions and penalties and even the denial of insurance coverage in the event of an accident.

Private Aircraft and Flight Department Companies Are Subject to Different Federal Aviation Regulations

Private aircraft typically operate under the general aviation/non-commercial operations provisions of Part 91 of the federal aviation regulations (FARs). Air charter services generally operate under Part 135 of the FARs, which subjects air charter operators to rules and operational and maintenance requirements that are much more stringent than those of the more lenient Part 91. Obtaining a Part 135 certificate for an air charter operation, furthermore, is time-consuming and expensive.

Many aircraft owners or operators assume that the most advantageous option for managing corporate aircraft and protecting against liability is to organize a Limited Liability Company (LLC) or other single-purpose company to own and operate the aircraft. The single-purpose company, so the thinking goes, allows the aircraft owner/operator to limit liability with regard to the aircraft and to reap tax benefits. That company, however, would be a flight department company, and its activities remove it from the scope of Part 91 and subject it to the Part 135 rules. Without the Part 135 certification, the single-purpose company is violating FAA rules.

Criteria for Private Aircraft Usage versus Flight Department Company

To fall within the scope of Part 91, and avoid the Part 135 obligations, aircraft operators cannot be compensated in any way for flying passengers or cargo. The definition of "compensation" is not limited to charging for airfare or charter fees; it can include an exchange of services or receiving goodwill or payment of operating expenses, even from closely related persons. Furthermore, Part 91 operations by a company must be "within the scope of, and incidental to," the business of the company, and no charge, assessment or fee can be made for carrying passengers or cargo. As used in Part 91, "incidental" means that the business of the operator must be something other than flight operations. Establishing a single-purpose company to operate an aircraft will subject the operator to the requirements of Part 135 because the company's only purpose is to operate the aircraft: the aircraft is the business of the company, not incidental to it. In the FAA's view of flight department companies, it does not matter whether the single-purpose company provided air services only to its owners or affiliates, whether the company operated on a break-even basis, or whether the reimbursement was accomplished by capital contributions to the company.

Alternatives to Creating a Flight Department Company

Despite the breadth of the FAA's interpretation of its rules, there are several ways that aircraft owners can avoid creating a flight department company, such as direct ownership, dry leases, arrangements with appropriately licensed air charter operations, and time-sharing and joint ownership arrangements.