In this month’s QoM, we’ll look at the following ways that a flying club—and its members—may stay true to the phrase “being in good standing”:
- Following the rules
- Financial responsibility
- Reports, returns and filings
- Club reputation, on and off the airfield
- Members in good standing
Off we go, then!
Follow the rules—organizational and operational behaviors:
An idea came to me as I was pondering this article: Do the five hazardous attitudes—those factors which interfere with the ability to make good decisions and exercise authority—apply to collectives such as flying clubs, as well as to individuals? After much chin-scratching, I concluded that the answer is a resounding “yes”. I’ll develop these thoughts in another article, but for now, let’s consider one of them:
Antiauthority—Don’t tell me what to do. Solution: Follow the rules, they are there for a reason.
If we disregard the conspiracy theory of the day, it is reasonable to assume that rules are established based on experience and retrospection, in order to provide a framework for people to work together in mutually beneficial ways. Great—but it only works if a) Everyone follows the same rules, and b) Enforcement keeps the mavericks in line.
Let’s look at the notion of rules in the context of flying clubs “being in good standing”.
Regular readers will know that we, your loyal flying clubs team, have produced an impressive, growing and ever-changing library of resources to help new clubs get established, while conforming to the latest guidance from the FAA, IRS, State Business Bureaus, and so on. This same material is useful for existing clubs—especially those that formed 10, 20, 30…years ago. When you think about it, it should be no great surprise that a flying club forming today will be different in many ways from a club that started years ago.
A good example of this is to compare Advisory Circular 00-25, Forming and Operating a Flying Club, which was unceremoniously cancelled in 2017, to the latest FAA guidance found in section 10-6 of FAA Order 5190.6B (Change 2). The differences are many and wide-ranging and relate not only to the operation of flying clubs, but also their missions and very legal establishment and governance. In short, any club continuing to operate under AC 00-25 (and we hear of several every month) is just the next new airport manager away from getting itself into quite a pickle.
Now, I don’t want to make this article about comparing old and new, but it is worth listing just a couple of differences:
- Back in the days of the AC, clubs could legitimately form to help businessman-members profit from the use of club airplanes. Nowadays the FAA clearly state that clubs must be non-profit in nature and club planes are for personal use and enjoyment, only.
- Another oddity by today’s standards is that a club (yes, a club, not a flight school) could establish for the sole purpose of teaching people to fly. FAA Order 5190.6B (with the amendment that is now part of Change 2), expressly prohibits non-profit, socially-based flying clubs from soliciting for members based on any promise of teaching people to fly—and quite right too, since the non-profit nature of flying clubs can easily undercut the more expensive operations of flight schools and FBOs that provide services to the public.
Just to cement the point, here is a direct quote from the Introduction section of the cancelled AC:
There are clubs organized by businessmen to make lower-cost business travel available to members. There are clubs organized by people who simply want to enjoy the experience of flying or to use flight as a means of transportation to recreational activities. And, there are clubs organized as a means of providing aeronautical education to members.
The AC of course will live forever on the internet, and it is actually quite an amusing read, along with the monochromatic photos of besuited club officers who exude upstandingness…but…the only part that endures today is that flying clubs are organizations of people who want to share in the expenses and experiences of flying for recreational purposes—everything else is fusty history and by today’s standards, utterly wrong!
Rather than dwelling on how it used to be (some rogue clubs may actually cry over the passing of the AC), take the opportunity to re-read FAA Order 5190.6B (Change 2), section 10-6, which is the guidance that all flying clubs, old and new, must now be following—there is no grandfather clause for older clubs. If your reading raises other questions—and I bet it does—take a fresh look at the encyclopedic The Guide to Starting a Flying Club, which is of equal relevance to mature clubs. This document captures our seven-plus years of working with clubs and government agencies…so we know a thing or two. Over the years we have dissected every part of the flying club section and have provided logically argued interpretations of the FAA Order, all of which have been reviewed by AOPA legal. This can all be found in the Question of the Month section of the Club Connector Newsletter, and in the more than 40 episodes of Flying Clubs Radio.
So, in this organizational and operational context, being in good standing means understanding and following the rules as laid down by the FAA and the IRS, and must be treated as really serious stuff. This, along with our detailed guidance, should leave little room for creativity, but two or three times a month, we hear from clubs who firmly believe that the rules do not apply to them. The fact is, to be a correctly operating flying club and not a commercial operator, flight school or anything else, you MUST follow the rules that are unambiguously defined by the FAA, which, by the way, contains language that is also used by the IRS in the context of non-profit organizations—more later. It is up to the board-of-the-day to ensure correct compliance. We will absolutely help you, but you have to be open to change!
As we have stated many times before, we are not the flying club police, and we will never “rat-out” a non-compliant club. There is absolutely no reason for us to do so, as we know from experience that such clubs are destined for trouble, and when it hits, they will have us, the AOPA state advocacy team, and AOPA legal, on speed-dial. (All good reasons to sign-up for the Legal Services Plan). We do, however, exercise our right to remove, from the AOPA flying club finder, clubs that do not conform to our carefully-written Standards, Values and Best Practices document.
You may be wondering about the types of rule infringements and “misunderstandings” that we most often hear about:
- Organizations that use the term “flying club” in their name but clearly are in it for a profit. Some of the really big “flying clubs” fall into this category. Don’t be fooled by their marketing…you will not be a co-owner and will probably have little input in the running of the organization, even if you do pay membership dues. If this is what you are looking for—basically a rental operation—then great…but these are rarely true flying clubs. Not that all big clubs fit into this category by any means…but operational and market forces make it really easy for such clubs to incrementally edge towards being commercial operators in disguise…but without all the additional compliance and oversight required of such organizations. The article “Be Careful What You Wish For” pokes hard at this and other ways to royally mess-up a flying club!
- We regularly hear from clubs who argue that rules do not apply to them. We always work hard to help steer them straight, but sometimes the levels of entitlement can be overwhelming. Many simply do not care…”we will take our chances” was the phrase used by one club that we tried to counsel…and then they wondered why, sometime later, they were hauled up in front of the airport manager.
- Some clubs believe that they have a mandate to grow in members and aircraft, because of some short-term demand or sense of duty. Remember that a flying club is a social club and not a business, so there should be no to pressure to grow. Bear in mind that more people equals more drama, which equals more siloes…so be careful what you wish for! True, there might be some benefits of scale through growth rather than starting a new club, but as we have seen repeatedly, the social culture of a club will incrementally erode as you go beyond about 20-30 members with 2-3 planes. Rather than assume you have to grow to stay operational, take a look in these articles for some options: “Is Our Club Still Viable?”, “What Can We Do to Ensure the Longevity of Our Flying Club?”, and “Our club is struggling—what options do we have to stay operational?”. Our Flying Clubs Radio audio articles do not hold back, either! Furthermore, beware of what I call the “Professor Lockhart” syndrome (from the Harry Potter books). Someone who is full of ideas and self-importance, but magically disappears when work is required and/or the going gets tough!
- Flying clubs that openly advertise primary flight instruction. "Come and join our club, we are cheaper than the local flight school”, or “take a discovery flight with one of our club CFIs, for just $99”. Real flying clubs must never offer paid rides to non-members (and doing so, will, without doubt, void the club’s insurance). Furthermore, there is actually no such thing as a “club CFI”. Clubs do not provide CFIs just like they do not provide the aircraft for particular missions. Members may use the services of other club members acting as independent CFIs—and must pay the CFI directly, not through the clubs’ accounts.
- Sometimes, usually for all the right reasons, a club might single-handedly try to solve general aviation’s problems. We heard recently from a club that openly admitted to poaching student pilots from a local flight school since, in their opinion, the school was not providing a professional training environment and was, in their words, “ripping-off” students. Noble as this might sound, it is completely the wrong thing to do. If the school really is that bad, market forces will prevail, and it will fail. In the meantime, the school would be quite within its rights to complain about the club’s behavior, which would not end well for the club.
- I want to sell my flying club.
- No, you don’t, as no one person owns a flying club.
- I want to buy a flying club.
- No, you don’t, as no one can sell a flying club.
- As a non-profit LLC flying club, we do not have to file or pay taxes…
This last point makes an excellent segue to the next two measures of a club (as an entity) being in good standing, and that is to do with responsible, accurate, transparent and timely, bookkeeping and reporting.
The club’s board of directors are collectively responsible for the organization, governance, operations and financial management of their flying club. For a more detail look at these responsibilities, see: Question of the Month: What are Board and Officer Positions—and What Do They Do?
In the case of financial management, the Club Treasurer rules supreme. I think it is fair to say that this is the most important position in the whole club. Yes…indeed, having a president who runs a tight ship is essential, and the jobs of safety and maintenance officers are vital to successful operations, and the same argument can be made for all board and officer positions, but as we all know the thing that makes airplanes fly is…money. Having been treasurer of several flying clubs (and an airport authority), I could go on and on about the role, its duties, responsibilities, some tips to stay sane, but in the scope of this article, the treasurer has the awesome responsibility to:
- Establish a workable budget and get approval from the board of directors. A club will never be in good standing with anyone (members and suppliers) if the budget doesn’t work. A really key aspect of this is understanding what the market (the members) will bear. It is fine-and-dandy to propose a budget that will allow the club to upgrade the planes’ avionics in one go, but will members agree to the xx% increase in club dues? Take a look at some earlier Question of the Month articles for more information on this…but the important thing to remember is that members provide the only source of income for flying clubs .If somebody has the idea of trying to raise money outside of club memberships (and in time, somebody will suggest raffling plane rides, selling club tee-shirts and so on), take another look at “How May Flying Clubs Raise Money?” to see just how quickly you may end up “not being in good standing” with the IRS!
- Cash flow and the related topic of maintaining the club’s financial records. This is the accounting part of the treasurer’s position and is essential for the management of cash flow and paying the bills. A club will never be in good standing with suppliers and service providers if it doesn’t pay bills on time and will definitely not be in in good standing with the bank if it regularly dips into overdraft. Members have a role here, too. Pay your bills on time so that the treasurer can do the job you elected them to do.
- Even in a small flying club, lots of money flows in and out of the accounts. An important part of the treasurer’s position is to report the financial situation of the club openly and transparently to its members, on a regular basis. These reports should also be available online, so members may review them at their leisure. Use the document repository feature of your club management tool to make this really easy and available. In my experience, most treasurers want to give a detailed report at monthly meetings, but rarely get any feedback from members. You don’t have to analyze multi-dimensional pivot table spreadsheets every month, but your treasurer will appreciate a question or two that allows them to talk about the many hours of work they do on behalf of the club. Not only that, but the brilliant concept of checks-and balances only works if someone else actually bothers to check and balance!
Still staying with financial responsibility, let’s look now at another vital and essential duty of the club treasurer—that of ensuring that the club remains in good standing from a legal perspective.
Reports, returns and filings:
“All flying clubs should establish, within their state of operations, as non-profit organizations, and are required to adhere to all state and federal reporting and filing obligations”. This simple 27-word statement seems to elicit an unlimited number of opinions, interpretations, and just good ol' myths!
Failure to abide by the above is the #1 reason that we see flying clubs NOT being in good standing, and not being in good standing with any government organization will eventually catch up with you and will be at best, complicated and expensive, and at worst, may be catastrophic.
Without wanting to regurgitate too much from previous QoMs and Flying Clubs Radio editions (for example, editions 40a and 40b), it is actually quite straightforward:
- The FAA defines a flying club as being a non-profit (or not for profit) entity
- A flying club is a hobby/social club, not a business and not a charity, in any way or form
- The IRS recognizes that income to hobby/social clubs comes from members—and those members have already paid income tax on the dues, fees, etc., that they pay to the club
- Many states impose sales or use taxes that are entirely separate from federal and state income taxes. Depending on where the club operates, if you purchase or use something you may well be expected, nay, required, to pay the appropriate taxes
Let’s look a bit more at each of these—again, in the context of “being in good standing”:
- Make sure you know, for certain, how your club was established and registered in your state. This is really easy to do and is a matter of public record. Just go to your state’s business portal and search using your club’s legal name. By the way—the search will also report on your standing status—in good standing, or not. If not, then give me a call, as we have some things to discuss, and some work to do!
- The type of entity will determine the club’s reporting and filing obligations:
- If you formed as a non-profit corporation then you did the right thing. Bear in mind that in some states this might be called something like a non-stock corporation. You never want to establish as a C-Corp or S-Corp. If you do a search for “starting a business in <state>”, you’ll have lots of options to pay good money to scammers who want to charge for what you can do yourself, for free. Go only to real .gov websites: as examples: https://egov.maryland.gov/BusinessExpress/, and https://www.oregon.gov/business/pages/index.aspx
The same website will remind you of your filing obligations. You will be required to file an annual report to the state, which may, or may not, include the payment of property tax—take a look at the AOPA State Advocacy website to get an idea of aviation-related taxes in your state. Contact your Regional Manager (same website) with any questions…you do not want to get this wrong!
In addition to the annual report, the club will be expected to file a federal corporation tax return (Form 1120) and the equivalent state corporation income tax return…unless…the club has received a letter of determination from the IRS granting federal tax exemption. Some states may also exempt the club from state income tax based on the letter—write to your state’s tax department, including a copy of the federal letter of determination, to request state exemption. If you don’t ask, you won’t get…and you will be expected to pay state income tax (as applicable). As with all things to do with taxation, claiming ignorance is no defense.
- If your club was formed as an LLC, then you have a couple of choices—either stay as an LLC, accepting the more complicated tax filing requirements and the fact that you will (probably) never be able to apply for tax exemption as a social club, because, by definition, an LLC is a business that is expected to return a profit. Alternatively, work with a good business lawyer to do a one-time conversion from the LLC to a non-profit corporation.
If you elect to remain as an LLC, then the club must provide each member (of the LLC) a Schedule K-1, stating each member’s share of profits and losses, which they must then include with their personal tax returns. This is called pass-through taxation and can royally mess-up individual member’s tax situations. Alternatively, if you really must stay as an LLC (and I see no reason to do so), consider applying to the IRS for the LLC to be taxed as its own legal entity. See Form 8832.
- If, as a non-profit corporation, your club applied for and received a letter of determination from the IRS granting tax exempt status under IRS 501(c)(7), Social/Hobby Clubs, then you are still not off the hook from filing something! You will have to file, annually, Form 990, Return of Organization Exempt from Income Tax. For most flying clubs this is a simple “postcard”, but it is vitally important. If you fail to file Form 990 for three consecutive years, the IRS will (not might) classify the club as no longer being in good standing and will (not might) rescind tax exempt status. Getting back exempt status is extremely, extremely, difficult. We know of several unfortunate clubs whose new treasurer didn’t receive any training, and consequently failed to file any reports and returns until the inevitable happened. Did I mention that the treasurer is the most important position in a club? Second then, must be the position of treasurer-in-training, as you simply cannot allow such mistakes and lapses to occur!
- Full disclosure. We have heard that the IRS may accept Form 990 from clubs that “self-declare” to be operating in accordance with the rules of 501(c)(7). Presumably, this may apply to non-profit corporations that have not received a letter of determination from the IRS. We think, and our colleague in AOPA legal agree, that this is a really risky practice and advise all clubs to always get the required documentation from the IRS. Just do it right!
- Do not even try to file for tax exemption under 501(c)(3). There is just no way that a member-only flying club can claim to be a public-benefit charity! Use http:Form 1024 to apply for 501(c)(7) tax exempt status.
- Depending on your state of operations, a flying club may be required to pay other taxes and fees. A common one is sales tax on the “usage” of club aircraft. This is certainly true in Maryland, where my club, The Westminster Aerobats Flying Club, Inc., levied a 6% sales tax on the aircraft per-hour rate and then every quarter, the treasurer (me), completed a Maryland Sales and Use Tax Return, and paid the bill. There are a number of things to learn from this:
- Determine if such sales/usage tax applies in your state. Again, AOPA members may use the expertise and resources on the AOPA State Advocacy website to help with this.
- If it does apply, ensure that the sales tax percentage is automatically added on invoices for billed hours. Most club management tools have this capability.
- Ensure that your accounting system, spreadsheet or whatever, tallies-up all withheld sales taxes, so it is easy for the treasurer to file the required returns on the expected schedule.
- This gets a bit complicated (!), but if your state does levy a tax on aircraft usage, then, if the usage rate includes fuel (wet rate), the per-hour rate will already include some amount of sales tax paid. Many states will allow you to reduce the usage tax owed, by the amount of fuel sales already paid. Definitely look into this, but you ‘ll need a rock-solid method of determining the amount of tax paid—basically, the number of gallons bought in the taxable period multiplied by the appropriate rate of tax applied to fuel purchases. I’d love to hear from clubs that actually do this—please email me at [email protected]
- Some states, for example my new home state of Oregon, impose an annual aircraft registration fee—yet another way for aircraft owners to be in (or not in) good standing with their state. For my Aerobat, the fee is $65 per year, which I am more than happy to pay as it goes directly towards airport maintenance and improvements.
- NEW – PLEASE READ: FinCEN’s Beneficial Ownership Information Rule (BOI):
Some of you may have heard about the new “FinCEN’s Beneficial Ownership Information Rule (BOI)”, that came into being in September 2022. The rule essentially requires all corporations, LLCs and other legal entities to file a (new) report containing “Beneficial Ownership Information (BOI)” to the Financial Crimes Enforcement Agency (part of the department of the Treasury).
So…all you club treasurers are now wondering…does this apply to my flying club? Well, it might.
I will provide a link to the Final Rule a bit later, but to save you the hassle of ploughing through 99-pages of shear reading pleasure, this is how we believe flying clubs may be impacted:
- Clubs formed as LLCs. Reporting will be required.
- Clubs formed as corporations (non-profit or otherwise). Reporting will be required.
- Clubs formed as non-profit corporations AND have received a letter of determination from the IRS granting tax exemption under 501(c)(7). Reporting will not be required.
Given point number 3 above—that non-profit flying clubs holding formal 510(c)(7) exemption will not be required to provide the BOI report—then this is yet another reason why all flying clubs should form as non-profit entities and not as LLCs…and don’t let anyone try to tell you differently!
Note that we are talking about clubs that have filed IRS Form 1024 and have received a letter of determination approving the tax-exempt status. Now, as mentioned earlier, we have heard that some clubs are filing Form 990 (rather than Form 1120) to “self-declare” that they are operating under the rules of 501(c)(7), rather than formally applying using Form 1024, so avoiding paying the $600 one time filing fee. Not only is this risky practice (always get approval letters from the IRS), but this now will not relieve such clubs from the new filing requirements.
To date, there are not many details about the actual reporting methods or forms, but there is a new website, which treasurers should check every now and then, but especially at the end of the year. We will let you know when we know more. Please do not email the flying clubs team or AOPA legal about this. We simply do not have any more details!
For some more interesting background, see Ian Arendt’s article here, that contains links to the actual ruling.
Club reputation on and off the airfield:
Going back a few pages to the start of this article, I conjectured that a flying club “being in good standing” is akin to fully understanding, adhering to, and accepting all responsibilities and obligations. It is now a short path to consider how such a club is actually perceived—especially by non-members. In other words, what is the reputation of the club?
Is it a good club? What makes it a good club? Does it have an exemplary safety record? Are members happy? Is there a waiting list? Are the planes always flying? Does the club understand its place in the overall ecosystem of the airport? Does the club provide community outreach to help the lot of GA? Does it initiate and support airport events?
All of the above—and more—are important when thinking about the wider concept of reputation, and of course, any negatives will adversely affect the notion of being in good standing. A really simple way for clubs to maintain a good reputation is through positive outreach—to other pilots, airport tenants and the wider community. Most of this is common sense. Local pilots form the pool of prospective members, airport tenants such as maintenance shops provide needed services, the FBO might have a nice meeting room that a club can use, and as we know, general aviation needs all the help it can get to educate “the public” about what we do, and why we do it. Don't get me started..!
I’ll turn this into a challenge. At your next club meeting, have a discussion about a wider role for your flying club and what you can do be known as an upstanding example of general aviation. Perhaps elect a Community Outreach Officer to be the main interface with other organizations such as the local EAA chapter, local charitable organizations, schools, scouts, and so on. You’ll know that you achieved “good standing” status when people come to the club with questions, seeking advice, asking for help, and asking for speakers for their events.
Members in good standing:
Alright then. Now that we have scratched the surface (!!!) of how clubs as entities may—or may not—be in good standing with an array of different external organizations, let’s turn inwards and look at how members view the club, and how members view members.
The requirements for members to “be in good standing” are most often included in a clause within the bylaws and is probably limited to the timely payment of club dues and fees, following rules for scheduling the planes, cleaning up after flights, and so on. These are good, reasonable, first-level expectations placed on all members, but is there more to it—should there be more to it? What do some people do or say such that others view them as “good” club members, and can it be captured and shared?
Here are some things to ponder:
- Do all members respect the rules of the club?
- Do all members pay their bills on time?
- Do all members volunteer their time to help with club activities, tasks and events?
- Do all members step up when it their turn to be a director or officer?
- Do members offer their skills and expertise for the benefit of other members and the club as a whole?
- Does the club encourage new members to actively participate in the running of the club?
- Do all members actively, and willingly, participate in the club’s safety program?
- Does the club require members to work a quota of service hours on behalf of the club?
If the answer to any of the above is “no”, even for just one member (yeah, that one…), then it is probably time to take some action. Furthermore, if you sense there is discontent and/or factional infighting within the club, it will be worth investing the time in re-reading previous Question of the Month articles, since, in our collective experience, things like this do not solve themselves…quite the contrary in fact.
Summary. How a flying club remains “being is good standing”:
- Understand and follow the rules.
- Run it as you would a business but enjoy it as a non-profit social and hobby club.
- Operate with the highest levels of integrity and honesty, even—especially—when no one is looking (or are they…?)
- Do not mess with the FAA, IRS and state organizations. FAA vs. ABC Flying Club probably has only one outcome. Do not be like the club that lied to the IRS when trying to claim they were an “educational charity”, in order to receive tax except status under IRS 501(c)(3), just so that they could further argue with their state’s tax board about not having to pay sales tax on the planned purchase of another club plane. Good grief…
- Know, understand and internalize your responsibilities and obligations as a legal entity. Failure to do so can have far-reaching consequences. It is your responsibility to know what you must be doing—claiming ignorance is no defense.
- Keep your club treasurer happy. This board position is probably the most important and complicated of all, and maintaining local knowledge is vital. This is the one board position where we break with our own advice and not impose term limits…good treasurers are worth their weight in avionics equipment. But…and a big but, ensure that the treasurer has a trained stand-in, because things will happen…usually at the most inconvenient time, like during tax season.
- Smile when you pay federal and state taxes, on time. If you don’t like it, then take the opportunity to explore tax-exemption opportunities, but be advised...you must be operating within the rules.
- If your club (still) operates as an LLC, then, IMHO, it is not conforming to latest FAA and IRS guidance. New clubs should never form as LLCs. Line 1 of the FAA definition of a flying club is:” FAA defines a flying club as a nonprofit or not-for-profit entity…”. This is pretty clear, right? As all states have the option of forming an entity as a non-profit corporation (NPC), why bait the bear by forming as an LLC and then try to argue that, well, we are actually behaving like a non-profit organization. Just do the right thing! New clubs should form as a non-profit corporations and existing clubs should think hard about doing a one-time conversion from LLC to NPC. By the way, strictly speaking there should be no way that an LLC—an entity with a profit motive—could ever be granted federal tax exemption…but we do know of some that have been successful, which proliferates the misinformation.
- If you do apply for federal tax exemption, it must be as a hobby/social club under IRS code 501(c)(7). In our humble opinion, which is fully supported by the AOPA legal team, there is no way that a true flying club can simultaneously satisfy the member-only rules imposed by the FAA, and being a public-benefit organization when applying to be a 501(c)(3) charity. Please not go down the path of claiming that a flying club provides some sort of educational benefit…this just will not fly! For ideas on how to separate an entity providing funding for training from that of a true flying club, see: “So, You Want to Start a Flying Club to Teach Kids How to Fly, eh?”
- Understand your state’s requirement for sale/usage tax and aircraft registration.
- Require that all members act respectfully. Society at large is making great strides at reinventing the notion of “being in good standing” and flying clubs should be no different. It is meant to be fun, so update the bylaws to allow the removal of belligerent bigots, with appropriate checks and balances to discourage dictators. In fact, as places for all people, clubs should be setting the example. Do not stand for anything less.
As always, fly lots and fly safely!