Club Talk: The LLC Trap - Why Many Flying Clubs Choose Wrong

This month’s Question of the Month dives into one of the most important—and often most confusing parts of launching a flying club: paperwork. Sure, picking the right airplane and finding a hangar are exciting steps, but before your club can take off, you need to get grounded in the administrative essentials. That means filing with your state, registering with the IRS, and setting up the legal and organizational framework that will support your club for years to come. This article assumes you’re already off to a strong start—with founding members, a bank account, flying club insurance, bylaws, and maybe even an airplane. (Though yes, you can absolutely start a club without an aircraft, it just might be a bit harder to attract new members without something shiny on the ramp.) Whether you're just beginning or finalizing your structure, understanding how to properly form a nonprofit corporation and secure the right tax-exempt status is critical. So, let’s break down what you need to know to build a flying club that’s not only fun and functional, but fully compliant and built to last.

We talk about it often, and for good reasons, but FAA Order 5190.6B Change 3, also known as the Airport Compliance Manual, is the key document that outlines how flying clubs are expected to operate. This manual is enforceable by airport managers at federally funded airports and provides important protection for flying clubs. Under these rules, clubs are treated as individuals, not commercial operators, which means they’re not subject to the same standards as flight schools or rental businesses. That’s a big win for clubs, but it comes with responsibility. To maintain this status, clubs must avoid any activity that could be interpreted as commercial service, such as advertising flight instruction or operating like a rental service. Why does this matter? Because flying clubs are intended to operate as nonprofit entities or corporations, not businesses. That distinction is critical, not just for compliance, but for preserving the many benefits that come with nonprofit status, including legal protections, tax exemptions, and the ability to operate affordably and fairly for members.

One of the first and most important documents your flying club will need is a solid set of bylaws. These serve as the club’s internal constitution, outlining how the club is governed, how decisions are made, and what responsibilities members and officers hold. Bylaws are essential for ensuring your club operates smoothly, transparently, and in compliance with both state and federal expectations. In fact, many states require bylaws to be in place before or shortly after filing as a nonprofit corporation. If you’re not sure where to start, AOPA offers a comprehensive membership packet that includes sample bylaws, a club application form, and operating rules (which we’ll cover in more detail later). Even if your club is still in its early stages, having clear bylaws in place sets the tone for a well-organized, member-focused operation.

When it comes to forming a nonprofit corporation for your flying club, the process can vary slightly from state to state, but the core steps are generally the same. Some states offer convenient online portals that allow you to file your articles of incorporation digitally, while others may require you to complete a fillable PDF and mail it in. You’ll typically find all the necessary information on your state’s Secretary of State website. If you’re unsure where to start, the AOPA Flying Club Initiative team is always happy to help you navigate your state’s specific requirements. Filing as a nonprofit corporation is more than just a formality, it’s the highest level of legal organization for a club and comes with significant benefits. It provides legal protection for members and officers, helps establish credibility with potential members, and positions your club to qualify for federal tax-exempt status under IRS 501(c)(7). Most importantly, it reinforces your club’s purpose: to serve its members, not to generate profit. This structure also supports your ability to operate as an individual at an airport, in line with FAA guidance, while maintaining transparency and accountability.

It’s a common misconception among new club founders that forming an LLC is the best way to establish a flying club. While the filing process for an LLC may appear straightforward, there are several critical reasons why this structure is not appropriate for a flying club. First, LLCs are inherently for-profit entities, designed to generate income for their owners, and in a true flying club, there are no “owners,” only members. Flying clubs exist to minimize costs and share resources, not to make a profit. Additionally, LLCs are not eligible for 501(c)(7) tax-exempt status, meaning the club would be subject to federal income tax. Unlike nonprofit corporations, LLCs also lack the built-in governance structure that promotes transparency and accountability, two essential qualities for maintaining member trust and long-term stability. Most importantly, operating as an LLC could conflict with FAA Order 5190.6B, which outlines how flying clubs must operate at federally funded airports. An LLC structure may imply a commercial intent, which could jeopardize your club’s standing and create unnecessary friction with airport authorities. For these reasons, forming a nonprofit corporation and applying for 501(c)(7) status is not just the better option, it’s the right one.

Once your state approves your organization as a nonprofit corporation, you’ll be eligible to begin working with the IRS, either immediately or shortly thereafter. The first step in this process is obtaining an Employer Identification Number (EIN), which is required to apply for federal tax-exempt status. Applying for an EIN is quick, free, and can be completed online in just a few minutes. You’ll receive your EIN as soon as the application is submitted. Be sure to use your flying club’s official name as registered with your state when applying.

Now for the fun part, tax exemption. There are several types of tax-exempt statuses available, but in our experience, two options tend to generate the most questions from members. Let’s start with the 501(c)(3) designation. This exemption is intended for organizations with a charitable purpose, such as religious, educational, or scientific missions.

So, why doesn’t this work for most flying clubs? Simply put, flying clubs are typically formed to provide recreational flying opportunities, not to educate the public or serve a charitable cause. It’s important not to confuse this with flight instruction. Instruction can still be offered within a flying club, but only under specific conditions, such as not advertising it publicly.

Recreational and social purposes are not permitted under 501(c)(3). In fact, misclassifying your club under this exemption can lead to serious consequences. For example, if your club owns an aircraft and is registered as a 501(c)(3), the IRS could require the aircraft to be donated upon dissolution of the club. Worse, the club might be liable for years of back taxes. Additionally, if the airport enforces grant assurances, they could argue that the club is operating under the wrong legal structure and potentially shut down its operations.

The best tax exemption for a flying club would be the 501(c)(7) status with the IRS. The reason is because this exemption is specifically designed for pleasure and recreation. Flying clubs exist to share aircraft, reduce costs, and promote camaraderie among members easily fall into this category. This exemption also allows clubs to provide direct benefits to members such as access to aircraft. Income from membership dues, assessments, and member-use fees are exempt from federal income taxes. The way to file for this exemption would be through the IRS website. This document is called Form 1024. It is relatively easy to fill out and we have an example of how it should be filled out on our flying club resource page.

Here’s a clear comparison chart that highlights why the 501(c)(7) designation is generally the most appropriate and beneficial tax-exempt status for flying clubs

Flying Club Structure Comparison

Operating rules are a vital part of any flying club because they lay the foundation for how the club operates day to day, ensuring safety, fairness, and accountability among members. These rules help everyone stay on the same page by clearly outlining expectations for aircraft use, flight proficiency, maintenance responsibilities, and member conduct. They also play a key role in keeping the club compliant with FAA regulations and insurance requirements, while minimizing liability. Without them, misunderstandings and inconsistent practices can quickly lead to conflict or even safety risks. Typical operating rules cover things like who can join the club, how aircraft are scheduled and maintained, what safety protocols must be followed, and what happens if someone breaks the rules.

When it comes to starting a flying club, there’s really only one clear path forward: forming a nonprofit corporation in your state and applying for 501(c)(7) tax-exempt status with the IRS. This structure is specifically designed for social and recreational organizations like flying clubs, allowing you to legally share aircraft, reduce costs, and provide direct benefits to your members, without the burden of federal income tax. Unlike an LLC, which is inherently for-profit and incompatible with FAA flying club guidelines, or a 501(c)(3), which is reserved for charitable and educational missions, the 501(c)(7) aligns perfectly with the purpose and spirit of a member-owned flying club. Pairing this with well-crafted bylaws and operating rules ensures your club is transparent, compliant, and built to last. If you want to protect your members, operate within FAA and IRS guidelines, and create a sustainable, community-driven organization, 501(c)(7) isn’t just the best option, it’s the only one that truly fits.

Don’t forget about our resources page at https://youcanfly.aopa.org/flying-clubs This is where you can find all the above resources mentioned.