By Michael K. Elson, Attorney at Law. Mr. Elson holds a commercial rotorcraft rating and pilots helicopters on the weekends.
Creating revenue is the principal goal of any commercial helicopter operator. Also of utmost importance to operators and investors is the desire to avoid personal financial liability for the obligations of the business. This is particularly true when the business involves a potentially dangerous element like providing helicopter tours and charters to the general public. Creation of the corporation concept and more modern business entities such as the Limited Liability Company, have created a risk barrier which encourages helicopter business ventures, while simultaneously shielding the owners' personal assets from adverse judgments.
Why helicopter operators are uniquely exposed
As a commercial helicopter operator, you are subject to virtually unlimited financial liability and exposure arising out of the operation of your aircraft. Substantial court judgments against helicopter tour operators and helicopter manufacturers are becoming increasingly common. Without the protection of a Limited Liability Company (LLC), your house, vehicles, bank accounts, investments, and other personal assets can be swept away if there is an accident.
Organizing the venture as an LLC
Organizing an LLC to operate your helicopter venture helps eliminate the liability risk to your personal assets. A properly created LLC is a distinct business entity with its own taxpayer identification number. The LLC, rather than you personally, becomes the owner of the individual rotorcraft — and the FAA registry will reflect the new ownership. In much the same way as shareholders of a corporation are protected from liability, the LLC will provide a liability shield to its owners' personal assets. Should the owners wish to manage the LLC's daily tour or charter operations, either in full or in part, they can be legally classified as employees of the LLC.
When the array of legal documents required for the LLC are completed and filed by your attorney, and the appropriate helicopter transfer documents have been submitted, you will no longer be personally liable for debts or judgments against the LLC. The LLC eliminates the double taxation and extensive formalities associated with a traditional corporation. Perhaps the most obvious changes are that helicopter lease agreements are between the LLC and the lessees, and lease and tour payments are made payable to the LLC. When legal actions are instituted, it is the LLC that is the named party in the action.
Viewing the franchise tax as insurance
An annual $800 LLC franchise tax fee is required by the State of California. This fee, however, can be viewed as a yearly "insurance" premium, which provides much more protection than conventional helicopter liability insurance with an equivalent premium amount. The beneficial result is that the maximum financial exposure to the owner(s) of the LLC — including liability from acts of employees — is limited to the helicopter and other assets held in the LLC.
Layering a living trust on top
While the LLC provides a substantial shield to your personal assets, it will not protect those assets from probate and estate taxes when you die. The revocable living trust, however, holds title to a person's personal and titled assets, including bank accounts, real estate, stocks, and LLC membership interests.
The living trust contains your instructions for the distribution of your assets after you die. Because a person's assets are transferred to their revocable living trust during their lifetime, probate is entirely avoided. After the person who established the living trust (the trustor) dies, the successor trustee(s) — usually the adult children or relatives of the trustor — distribute the trust assets to the designated beneficiaries named in the trust agreement.
The living trust eliminates probate and, under a variety of circumstances, can greatly reduce estate taxes. It may therefore be possible to pass a greater portion of your assets to heirs. However, unlike an LLC, the living trust is not designed to — and in most cases cannot — protect personal assets from exposure to lawsuit liability arising out of commercial helicopter operations.
The LLC and living trust work together to protect and preserve your assets. They can be instituted at the same time or independently of one another, and each can be modified or dissolved at any time.