For the majority of us, the most seriously frustrating part of general aviation flying is that we can’t do enough of it because of the cost. Despite periodic, breathless advertising claims of airplanes that can be flown for pennies a mile, the cold, hard fact about rising above the planet and moving under control is that it is expensive—and there aren’t any silver bullets that will magically shred the cost.
There are, fortunately, incremental steps we can take to reduce what it costs an individual to fly. One of the best is joint aircraft ownership via co-ownership or a flying club, to spread the fixed and some of the variable costs among two or more people.
CO-OWNERSHIP OR CLUB?
The line between what is co-ownership versus what is a flying club is more about how the aircraft is owned than the number of people involved. Put simply, co-owners of an aircraft share in the cost of ownership and operation of the aircraft and that’s it. They don’t have to have equal equity in the bird; their interests cross only in the ownership and operation of the aircraft, which they carry out pursuant to an agreement they hammer out between themselves.
A flying club usually, but not always, involves more pilots than co-ownership, is a legal entity—usually a nonprofit corporation—in which the members have equal equity and rights, and a part of its reason for existence is for the members to socialize and promote flying and the club itself.
CO-OWNERSHIP
From a legal standpoint, aircraft co-owners are not a partnership because a partnership is an association of two or more persons who carry on a business for profit—something significantly more complex than aircraft co-ownership where the goal is purely to cut an individual’s costs of owning and operating a flying machine.
We’ve observed co-ownerships to generally involve two to five people—more than that and insurers start to consider them a flying club for insurance purposes.
When forming a co-ownership agreement, the first decision to be made is how to dispose of a co-owner’s interest in the aircraft if she or he dies. In our experience, most pilots in co-ownerships want their interest to go to their heirs, so they set up the co-ownership as what is called a tenancy in common. Occasionally we see co-ownerships set up as a joint tenancy, which means that should one co-owner die, his or her interest in the aircraft passes to the other co-owner(s).
AGREEMENT
We strongly recommend that anyone contemplating co-ownership of an airplane put together a written agreement detailing specifically how they want the aircraft to be owned and operated. At a minimum the agreement should include: who is making the agreement, how the aircraft will be titled, how it will be financed, what insurance will be carried, who is authorized to fly the aircraft, where it will be based, scheduling its use, where maintenance will be performed, how expenses—fixed, operating, overhauls, upgrades—will be handled, specific responsibilities of each co-owner, how payments are to be made and what happens if a co-owner falls behind, sale of the aircraft whether voluntary or forced, life insurance, death of a co-owner and how disputes are to be handled.
Aircraft aren’t cheap and disagreements over them can get eye-wateringly expensive. In our opinion it’s essential to not only put together an ownership agreement but have an attorney with some knowledge of aviation look it over. We think the easiest way to find one in your area is through AOPA (www.aopa.org) and its Legal Services Plan. It may be worthwhile to join the plan as it offers some discounts on legal services with attorneys who are members.
On its website, AOPA provides its members with a great deal of information on aircraft ownership, including co-ownership. Our suggestion for crafting an ownership agreement is for the proposed co-owners to spend some time reviewing AOPA’s guidance while they decide how they want to handle all of the agreement topics we listed above. It’s an excellent way to sort out whether the proposed co-owners are of like minds when it comes to aircraft ownership and may reveal that it would be a bad idea for them to buy an airplane together.
If they can reach agreement on all of the topics, it’s time to put together a draft agreement and take it to a lawyer for fine-tuning and to make sure that they haven’t done anything that could be bad news downstream.
Whether co-owners decide to put the aircraft into a sub-S corporation or an LLC is a decision to be made in consultation with an attorney and an accountant. While a corporation or LLC provides some liability protection because one of the shareholders/members is not responsible for the actions of another, the real liability protection comes from insurance. What is usually more important is looking at state sales tax law when it comes to the sale of one co-owner’s interest in the airplane and the tax considerations of corporate/LLC ownership.
AIRCRAFT SELECTION
Aircraft selection usually comes down to a combination of desires of the co-owners, their ratings and experience, and insurance demands. As with any aircraft purchase, don’t buy an airplane until each co-owner determines whether he or she can be insured to fly it.
In speaking with insurance brokers we were told that it’s not uncommon for one prospective co-owner of a high-performance airplane to be on the edge, so to speak, on the insurability question, while the other(s) easily qualifies. Often coverage can be obtained, but the lesser-experienced pilot drives up the cost. Brokers said that they would advise the co-owners of the cost of insurance as presented and what it would be if the lesser-experienced co-owner were more on the level of the other(s). Usually, the lesser-experienced pilot agrees to pay the difference. It’s not unusual for the premium price to drop after a year or two, once the lesser-experienced pilot gets more time in type.
No matter how an aircraft is to be owned, the purchase process should always, always, always include a prebuy examination by a technician who has had no previous involvement with it. That should include, at a minimum, a flight by the proposed co-owner who has the most experience in type. We were advised by a reader who was in a co-ownership that the test flight was done by the proposed co-owner with virtually no time in type and he missed what turned out to be an expensive issue that would easily have been caught by a more experienced pilot.
If you are considering buying into an existing co-ownership the need for a prebuy exam may be even more important. We walked away from a co-ownership when the prebuy revealed we’ll over $10,000 of needed repairs. It also clearly told us about the attitude the co-owners had toward keeping the airplane in good shape.
Part of buying into a co-ownership also includes a detailed look at the finances. Is money set aside for overhauls and unexpected maintenance or is buying in potentially setting you up for a big hit if something expensive breaks?
FLYING CLUBS
A flying club might be thought of as co-ownership on steroids; however, all members have precisely the same interest in the airplane(s). A flying club is usually set up as a 501(c)(7) nonprofit corporation under the Internal Revenue Code—a social and hobby club organized for pleasure, recreation and other benefits for members. As a non-profit, it is not a competitor with FBOs at the airport. It does not exist to teach people to fly, although members can take flight instruction in club aircraft. The club, however, cannot provide the instruction, although it can approve and recommend instructors. There are for-profit organizations that call themselves flying clubs, but are really flight schools.
Club officers may not be compensated—everyone involved is a volunteer. Anyone joining a flying club should plan on volunteering for some job that needs to be done, and there are always many associated with keeping aircraft and the club itself healthy.
AOPA is a strong supporter of flying clubs and has extensive material on forming and running them, best practices for club operation and a directory of flying clubs. We urge anyone considering forming or joining a flying club to take a deep dive into the material on AOPA’s website.
A flying club should have bylaws that set out the organization and operation of the corporation. There should be a separate set of operating rules that are more flexible and easily amended than the bylaws because operational rules often need to be changed as the club evolves.
SHARED GOALS
The club should have goals that reflect the reasons that the members formed it and will develop a culture that either reflects those goals or, in clubs we’ve observed with problems, the demands of one person who is the de facto dictator of the club—a strong argument for club officer term limits.
The club’s books should always be open for inspection by the members. There should be full transparency in all club operations—something we’ve observed to be vital for a club’s long-term success.
Club expenses consist of startup, fixed and variable. The startup expenses include buying the aircraft and are covered by the initiation fee charged to each member. That is how a member obtains equity in the club. One of the initial decisions a club makes is what happens when a member leaves. Does the club buy the member out or does the member sell her or his membership with the club having the right to veto the selection of a new member?
DUES
Fixed costs are covered by monthly dues, which should be set to cover all fixed costs each month, something particularly important for clubs based where winter weather slows flying considerably. When the propellers aren’t turning the club has to stay financially healthy.
Variable costs, including overhaul reserves, are covered by the hourly fee (not rent, the members own the aircraft) to use the airplanes. A good club keeps a close eye on costs and adjusts dues and fees as needed. The goal is to never have to assess the membership when there is an unforeseen event.
SOCIALIZE
Socializing is an important part of any club’s success—it keeps members connected and involved. We’ve observed successful clubs to have regular airplane washes, cookouts, membership meetings, safety events, fly-outs and competitions. Those clubs also impose a fee for missing mandatory meetings.
Before joining a flying club we encourage a pilot to spend time with the members, look over the finances, fly the airplanes and generally get to know if the club is a good fit. If so, and your application is accepted, go in ready to save some money on flying and willing to help out wherever needed.
