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Richard
Richard, Attorney
Category: Business Law
Satisfied Customers: 45679
Experience:  32 years of experience practicing law and a businessman.
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The only assets our two member LLC will every have will be

Customer Question

The only assets our two member LLC will every have will be a $24,000 aircraft and a small balance in its bank account.

Seems to me if our liability in the worst case is limited to someone getting to sue us successfully for $24,000 that it doesn't make sense to pay $1500 a year (or even $600 per year) for a million dollars (or even $250K) of insurance coverage to protect against that very small risk of a very limited liability.
The question is does an LLC really limit ones liability? And what's your take on what my suggestion that an LLC in the case of a low value aircraft is sufficient liability protection?

I HAVE heard that that an LLC—formed for the sole purpose of owning/managing the aircraft—is no shield of liability for its members. In fact, neither is a corporation for that matter. It is very easy to “pierce the veil” of an LLC or corporation and go straight to the members/stockholders, again if the only reason for the legal entity is to own the aircraft and to shield the members from liability.

Is THAT so? I also have an LLC which is my legitimate bonafide computer assistance business that I've been running for decades and has been an Oregon LLC since 2009. It also has essentially no assetts (other than the aircraft if it owned it. If we purchased and register the aircraft in the name of THAT LLC would that be more liability protection? Or almost as easily defeated by someone with a claim against some incident with the aircraft?
Submitted: 3 years ago.
Category: Business Law
Expert:  Richard replied 3 years ago.

Good afternoon. If you treat the entity as a separate entity, it is a limited liability entity and it is very difficult task to pierce the corporate veil. It makes no difference if the LLC was formed for the sole purpose of a particular activity. In fact, most LLC's are single-purpose entities formed solely for such purposes. Your insurance agent should stick to the insurance business....insurance agents are biased anyway because this eliminates the need to purchase insurance and thus he doesn't get his commission.

 

 

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The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.

Customer: replied 3 years ago.

Thanks,

 

What you say makes sense because it is as far as I can tell common for joint owners of an aircraft to form an LLC for the specific purpose of managing the funding of the aircraft AND for liability protection. Yet I have also heard horror stories about litigants peircing the corporate veil. Not specifically anything to do with aircraft LLCs -- more cases where someone has essentially been operating a small business as a sole proprietor after having formed a corporation.

 

You wrote in part "If you treat the entity as a separate entity, it is a limited liability entity and it is very difficult task to pierce the corporate veil."

 

By "treat the entity as a separate entity" do you mean that we don't use it for other personal purposes (such as depositing our personal savings in it, or buying groceries or paying rent out of the LLC's bank account? Or do you mean something else?

Expert:  Richard replied 3 years ago.
Yes...that is exactly what I mean. The reason piercing the corporate veil happens is people get careless with their entities and as you suggest, pay personal expenses with LLC money and vice versa because the money happens not to be where it may be needed at the moment. Rather than making a distribution first to the members, they will pay the bill directly. This is what opens the door for piercing the veil. But, otherwise, almost impossible to pierce.
Richard, Attorney
Category: Business Law
Satisfied Customers: 45679
Experience: 32 years of experience practicing law and a businessman.
Richard and 6 other Business Law Specialists are ready to help you
Customer: replied 3 years ago.

I have not yet opened a bank account for our new LLC (expect to shortly).

 

The bank will require a social security number or an IRS or TIN -- A Tax Identification Number (Tax ID), also called an Employer Identification Number (EIN), Although it is highly unlikely we'll be hiring any employees except remotely possible casual labor to, say, clean a hanger, and will never have any tax liability (because no income) in the LLC, it seems to me that keeping my or my other member's personal SS numbers off the primary account ownership at the bank may be either purdent or even necessary.

Are you aware of any considerations that I would do well to be cognizant of in either applying to the IRS for an EIN or giving the EIN to the bank?

 

If I need to proceed to set up the account before I can get hold of the EIN is bank likely to be willing to let me change the

Expert:  Richard replied 3 years ago.

You will need to apply for the EIN. Your bank will require it to open an account and you will want your LLC to have its own identity. Were you the only owner, you could treat this as a disregarded entity, but I would still recommend you get an EIN for it. With two owners, you must get an EIN. You can do this on-line at the following website and have your EIN within about 10 minutes... http://www.irs.gov/businesses/small/article/0,,id=98350,00.html

 

Customer: replied 3 years ago.

Thanks,

Bear with me briefly?

 

I actually am already on the IRS site --

https://sa1.www4.irs.gov/modiein/individual/confirm-entity.jsp

partway through the application for the EIN/TIN.

 

After the first few steps where I entered my state and that there are two members in our LLC I got this text from their proceedure:

------------------

Due to the number of members in your LLC, you are considered a Multi-Member Limited Liability Company (LLC) as the
type of structure applying for an EIN.

Since you are a Multi-Member LLC we must initially classify you as a "Partnership"

If you do not wish to accept the default classification of partnership,
you can File Form 8832 (Entity Classification Election) to elect Status "Corporate Status", or File Form 2553 (Election by a Small Business Corporation) to elect S Corporation Status.

If you need to change your type of structure, we recommend that you do so now
otherwise you will have to start over and re-enter your information.

------------------

 

Somehow I think I do not want us to be considered a partnership, but am not at all sure whether that's any hazzard to us (I vaguely recall that what the IRS considers you does not effect the LLC protection that the state LLC provides and hope it does not create more combersome filing requirements (remember we will never have any income -- although I suppose we COULD have a "loss").

 

Is it OK to just proceed at this step, or is it advisable to go for the one of the other two statuses -- and if so which one? I'd rather not have to fill out yet another form and leave this smooth looking EIN routine if there's no compelling reason to. Can you help?

 

 

Expert:  Richard replied 3 years ago.
You do want to be considered as a partnership....this is only for tax purposes, not liability purposes, and it simply means you will be taxed as a flow-through entity and thus not subject to tax at the entity level and again at the individual level.
Richard, Attorney
Category: Business Law
Satisfied Customers: 45679
Experience: 32 years of experience practicing law and a businessman.
Richard and 6 other Business Law Specialists are ready to help you
Customer: replied 3 years ago.

Hello again. Thanks for your earlier answers.

 

Another possibly critial issue at least implicit in my original question about the liability protection of an LLC, appeart to not have been addressed:

 

Someone pointed out that even if the LLC does protect a liability incurred by one member's actions from spreading to the personal asetts of OTHER members that it does not protect a member from liability for his/her actions. Just For example, member-pilot John drives the plane on the taxi-way into an expensive nearby Learjet and the LearJet owner claims it is soley Pilot-A's negligence and that there's $100K in damage and sues for damages. It was suggested that although the Learjet owner can't go after Pilot/owner's-B's personal assets (home, or whatever) he can not only go after the LLC's small value (say $30K) but can indeed go after Pilot/owner A's personal assets. In short that the person doing the claimed damage has unlimited PERSONAL liability and the fact that the aircraft is owned by an LLC would not limit THAT. That the LLC may limit the liability both owners in their role as OWNERS but not in their role as individual pilots' actions.

In short, as a legal and practical matter they should not consider "being in the LLC" in any sense a substitute for liability insurance.

 

Is that correct?

 

On a similar tack: If on the other hand, say the aircraft burst into flames unattended and the liability would be limited to the "owners" of the aircraft, and in THAT case liability WOULD be limited to whatever assets were in the LLC. Do I have that right.

 

Pardon these convoluted sounding "what if" questions, but it seems prudent to inquire into them BEFORE faced with them rather than after.

 

Alex

Expert:  Richard replied 3 years ago.
You are correct. If the owners are doing something outside the scope of simply owning the aircraft...such as piloting...then their negligence inures to them, not the LLC, and they would have personal liability for their negligence. But, if they weren't piloting, and the plane blows up or crashes, the LLC is the only entity at risk.

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