Aircraft Ownership Structure: LLC, S-Corp, Trust, and Part 91 Considerations

Why does almost every private aircraft sit in an LLC?

Because a single-member LLC delivers liability isolation, clean title, and pass-through tax treatment without the payroll complications of a corporation. The aircraft is a depreciating asset that can crash, get arrested in a foreign jurisdiction, or generate a wrongful-death claim that exceeds hull and liability limits. Putting it inside the owner's operating company exposes every other asset of that company to those claims. A separate LLC severs the chain.

The LLC also simplifies FAA registration. Title goes in one name, the AC Form 8050-1 registers cleanly, and lender or lessor security interests perfect through the FAA Civil Aviation Registry in Oklahoma City and the International Registry under Cape Town. When the aircraft sells, the LLC either transfers the asset or the membership interests change hands — no re-registration drama if structured correctly.

What is the FAA "flight department company" trap?

It is the rule that an LLC whose sole purpose is owning and operating an aircraft for its parent or members cannot legally carry those passengers without a Part 135 certificate. The FAA's position, articulated through decades of Chief Counsel opinions, is that when the LLC has no business other than flying, providing transportation to its members is "compensation or hire" — which triggers Part 119 certification requirements. Flying anyway is illegal charter, and the insurance carrier will deny the claim after the accident.

The fix is a dry lease. The aircraft-owning LLC leases the bare aircraft (no crew) to the actual user — the operating company, an individual, or a related entity — which then provides its own pilots or contracts them directly. The lessee becomes the operator under FAR Part 91, exercises operational control, and the LLC is a passive titleholder. The lease must be truthful: the lessee pays the LLC, hires or contracts the crew, controls the schedule, and bears the operational risk. Sham leases where the LLC still runs everything fail under scrutiny.

For aircraft over 12,500 pounds maximum takeoff weight, the Truth-in-Leasing requirements of 14 CFR 91.23 apply: written lease, specific disclosures, copy filed with the FAA Aircraft Registration Branch within 24 hours of execution, and notification to the local FSDO 48 hours before the first flight.

When does S-corp election make sense for an aircraft?

Almost never for the aircraft-holding entity itself. S-corps create three problems for assets that generate large depreciation deductions. First, S-corp shareholders need basis to deduct losses, and entity-level debt does not give them basis the way partnership debt does — so a financed aircraft generating bonus depreciation can produce suspended losses the owner cannot use. Second, S-corps require reasonable compensation if the shareholder performs services, dragging payroll tax into what should be a passive holding structure. Third, distributions of appreciated property from an S-corp trigger gain recognition as if sold at fair market value under IRC §311(b), making it expensive to unwind.

Partnerships and disregarded LLCs avoid all three issues. Debt creates outside basis, no reasonable compensation requirement exists at the entity level, and property distributions are generally tax-free under §731. The right structure is usually a disregarded single-member LLC owned by the operating S-corp or by the individual, not the aircraft LLC itself electing S-corp status.

What does an owner trust accomplish?

An owner trust solves FAA registration eligibility for non-U.S. citizens, not tax. Under 49 USC §44102, a U.S.-registered aircraft must be owned by a U.S. citizen, resident alien, or a U.S. corporation with required citizenship percentages. Foreign owners cannot register N-numbered aircraft directly. The workaround is a non-citizen trust under 14 CFR 47.7(c): a U.S. trustee (typically a bank or specialized trust company in Utah or Delaware) holds title for the foreign beneficiary, and the FAA accepts the registration so long as the trustee retains required authority.

The FAA tightened the rules in 2013 after concern that trustees were rubber stamps. Trustees must now exercise meaningful authority and respond to FAA inquiries about the aircraft. The trust does nothing for U.S. tax — the beneficiary is still the tax owner, and a foreign beneficiary still has U.S. tax exposure on any U.S.-source charter income, FET on charter flights, and possible ECI treatment if the aircraft is engaged in a U.S. trade or business.

How does bonus depreciation interact with the structure?

The structure determines whether the depreciation is usable, not whether it exists. Through IRC §168(k), bonus depreciation phases down — 60% for property placed in service in 2024, 40% in 2025, 20% in 2026, zero in 2027 absent legislation. To claim it on a business aircraft, the owner must clear §280F (qualified business use over 50%), §469 (passive activity rules if the activity is rental), and §274 (entertainment-use disallowance).

The §469 problem is the one that surprises owners. A dry lease from an LLC to its owner is rental activity, and rental losses are passive by default. Without grouping elections under Reg. §1.469-4 to combine the leasing activity with the owner's active business, the depreciation generates passive losses suspended until the aircraft is sold. The self-rental rule of Reg. §1.469-2(f)(6) recharacterizes net rental income as non-passive but does not free up losses. Sophisticated structures use a partnership between the operating business and the aircraft LLC, or careful grouping, to get the depreciation against active income.

What about state sales and use tax?

Structure does not avoid use tax — it only changes which state assesses it. Registering an LLC in Delaware, Montana, or South Dakota does not exempt the aircraft from use tax in the state where it is hangared and flown. California's Board of Equalization, Florida's Department of Revenue, and New York's Department of Taxation and Finance all audit aircraft based on physical presence, not LLC registration. Legitimate planning uses fly-away exemptions, interstate commerce exemptions, and timed delivery — not paper LLCs in zero-tax states.

What documentation does the IRS expect?

Contemporaneous flight logs identifying every passenger, the business purpose of every leg, and the allocation between business, personal, and entertainment use. Without it, §274 disallows entertainment flights entirely and §280F can recapture prior bonus depreciation if qualified business use drops below 50%. The SIFL rates published semiannually by the IRS handle imputed income for personal use by employees, but only if the flights are documented. An audit of an aircraft deduction without flight logs is a loss before it starts.