The US state of Delaware is known as a very entrepreneur-friendly place. For this reason, many business owners set up corporations in Delaware rather than their home state. But is this always a good idea? Aircraft Guaranty explores…
It’s not uncommon nor is it illegal for an owner to set up an LLC to hold the title to an aircraft. In general (and not only for aircraft owners) the taxing structure in Delaware is one of the most favorable for small businesses and LLCs. So, the term “Delaware Corp” refers to any company that is incorporated in Delaware in order to benefit from the state’s laws.
Aircraft Owners and Delaware Corps
Aircraft owners may set up an LLC to hold title to their airplane. This common practice is used to shelter the owner from liability. The aircraft title will be set up as a legitimate structure that is owned by the LLC. Often it is the only thing the LLC owns. If the aircraft does any damage, the LLC is responsible, not the aircraft owner.
This all sounds like a good idea, right? Unfortunately, when “good ideas” are misused or overused, problems can arise for those who have good intentions. Delaware Corps have become an easy way for aircraft owners to register an aircraft illegally.
Legal Zoom explains why this is: You can form a corporation more quickly in Delaware than in just about any other state, and, unlike some states, Delaware does not require you to publicly disclose the names of the corporation’s directors or shareholders.
Delaware Corps and the FAA
The FAA is cracking down on aircraft owned by Delaware Corps. They are finding that in some cases Delaware Corps have been used by non-US citizens to illegally set up a corporation and then register their aircraft as an asset of the corporation.
You might remember our earlier article that explained who is eligible to register an aircraft in the United States. Two thirds of a corporation’s membership must be US citizens.
Consider the case of a non-citizen aircraft owner who has a friend or relative who is a US citizen. If they set up a corporation in Delaware under the US citizen’s name and list their aircraft as an asset of the corporation, they can operate the aircraft under an FAA registration. But, because they are not a true corporation officer or owner, this is illegal.
The FAA’s registration system is not foolproof. They do not have the staff to check all LLCs for the two-thirds ownership requirement. Instead, aircraft owners are asked to fill out a Statement in Support of LLC which asks them to check a box stating whether or not they are a US citizen.
Much is based on the honor system, and there is no true policing on behalf of the FAA. Nonetheless, the FAA may question the paperwork on any aircraft at any time and for any reason.
Because of the ease of setting up a Delaware Corp, the FAA is taking closer looks on aircraft registered under these structures. They can and often do search Delaware’s website to look up the members or officers of the corporation. Then they can ask the person requesting registration for a passport or other proof of US citizenship.
The bottom line is that eventually the aircraft owners can experience problems if their registration is not obtained legally. The aircraft may end up with a clouded title, aircraft ownership may be legally questioned, or the aircraft may be seized.
Learn more about how short-term trust are the right way, and in fact the only way, for non-citizens to register an aircraft in the US.