Question of the Month: How Do Flying Clubs Differ from Other Forms of Co-Ownership?

One topic that we are frequently asked about in the flying clubs initiative is foundational, and yet not simple to answer: how, exactly, does a flying club differ from other types of aircraft co-ownership, and what are the advantages of forming a club?  The reason that the question is not a simple one is because what does or doesn’t constitute a flying club can change depending upon whether one is talking to an insurer, a finance company, or the Federal Aviation Administration (FAA).  This lack of a fixed definition can make it difficult to discern what a club is and how it differs from other forms of co-ownership. 

This article will attempt to clarify some of the questions that surround clubs by starting broad and gradually becoming more granular.  First, we will look at the basic ownership options available to someone who wants to share the cost of an airplane (in a not-for-profit manner), and then we will examine how these different forms of ownership might come to be considered a club.

Ways to Share an Aircraft

If you are looking for a way to lessen the expenses of flying by sharing an aircraft, there are three potential ways to accomplish this: to create a corporation, a limited liability company (LLC), or a simple co-ownership agreement with another owner or owners.  It should be noted that—among these options—an LLC is ill-suited as an entity for not-for-profit aircraft sharing.  This is because LLCs are, at their root, intended for profitable operations.  To share an owned or leased aircraft, a group forming an LLC is essentially creating a rental company, an endeavor that carries a significant amount of administrative burdens, including the need to depreciate the aircraft.  Even more importantly, navigating LLC taxes can be a minefield.  Much of this complexity arises from “pass through” taxation, which means that the LLC’s taxes pass through to each individual’s tax returns.  While the company itself does not pay federal income taxes, there are some states that require an annual tax from LLCs.    State laws treat LLCs in significantly different ways, so it is advisable for anyone who does pursue this route to consult a local attorney to learn the nuances of creating an LLC in their particular state.    

To establish a simple co-ownership arrangement, a group of co-owners need only draft a one-document agreement between parties.  The terms of such an agreement can vary drastically, and—like laws relating to LLCs—laws surrounding co-ownerships can differ significantly from state to state.  The advantage of co-ownerships is that they are simple to set up, and cause little in the way of administrative burden.  This simplicity comes at a price, however, as co-ownerships come with a greater risk of cross-liability (where each co-owner can be held liable for the actions of another) than other entities.  Also, it should be noted that—while it is common in aviation circles for the term “co-ownership” to be used interchangeably with “partnership”—the latter term more accurately refers to a for-profit arrangement.

A third way to share the cost of an aircraft with others is to set up a not-for-profit corporation.  There are several advantages to this type of entity.  First, as its name implies, it is an entity designed specifically for groups that want liability protection, but do not wish to make a profit.  For this reason, not-for-profit corporations are more ideally suited for aircraft sharing than LLCs, and afford more protection than simple co-ownerships.  Also, corporations are viewed by the law as a single entity, and are taxed as such.  This means that unlike LLCs—where individual members need to worry about taxes—groups that are formed as corporations are taxed as an “individual.”  Not-for-profit corporations also allow a much easier pathway to tax exemption for qualifying groups than LLCs.

How Are Flying Clubs Different?

While we’ve looked at the three different ways that one can share an aircraft in a not-for-profit manner, the central question remains: what precisely is a flying club, and what advantages do clubs carry with them?  As we said in the opening, the definition of a flying club can be different when talking to different people.  In the worlds of insurance and finance, flying clubs tend to be defined strictly by numbers.  When financing an aircraft, a group of more than four co-owners will be viewed as a flying club.  Insurance companies, however, view groups greater than five as a club. 

The FAA provides a bit more clarity in its definition of a club.  According to the agency, a flying club is “a nonprofit or not-for-profit entity organized for the express purpose of providing its members with aircraft for their personal use and enjoyment only."  This definition highlights a key aspect of any flying club—that it is not intended to be a commercial operation.  It also illustrates another important point: intent matters.  What differentiates a club from an alternate form of co-ownership is not as much about the type of legal entity that is chosen or specific numbers of owners as it is about the social aspect of the group and its reason for forming.  The term “club” implies that people who participate are united in an interest or goal, and that there is a camaraderie shared among its members.  A flying club should not be thought of as an alternative to co-ownership, but as an added dimension—that of community. 

So Why a Flying Club?

A final question to address is the following: given the option of joining or forming a club versus entering into a simple co-ownership agreement, why choose a club?  In the end, it all comes down to the social aspect.  Both arrangements will provide you with access to an aircraft, and both will allow you to fly at a lower cost than you could as an individual owner.  A flying club, however, gives you the additional element of being able to share aviation with others.  It allows you a better chance to get to know other pilots, to socialize, and to exchange stories.  It gives you an opportunity to pass along knowledge to a new generation of pilots, or to learn from aviators who are more experienced.  It gives you a support group, and a pool of like-minded pilots to tackle problems with.  Simply put, it gives you a whole added element of fun.  Are there other legal or tax advantages?  Depending upon the type of entity your club chooses, perhaps.  But if you are forming a club with only these advantages in mind, you are likely missing the broader picture: that the true gains to be had in a flying club come in the form of people.    

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