Don't Fly by the Seat of Your Pants

A limited-liability company makes sense for this pilot instructor, but the need for adequate insurance coverage is even more important

By Karen E. Klein

Q: As a flight instructor employed as an independent contractor with a co-op flight school, I am interested in forming a limited-liability company (LLC). Is this the best way to protect my estate in case of accidental death? Are there other options available? -- R.L., Tex.

A: The question of protection from liability is very complicated, and the law is always changing. But before we get into the complexities, let's deal with the straightforward: Liability insurance is a great asset-protection tool. In any business, property-and-casualty insurance is important, but special coverage is also available in various professional practice areas, such as yours. Look into purchasing that first. It will certainly help you sleep better.

That said, LLC's and corporations are excellent tools for liability protection, and corporate law is well-settled and uniform throughout the states. LLC's are relatively new on the legal and tax scene, however, having only come into vogue in the latter half of the '90's. That means there is, as yet, no uniform body of law for LLC's, so the rules may vary from state to state, says Chicago attorney Brian T. Whitlock, of Blackman Kallick Bartelstein. This could become a concern if your training flights cross state lines.

If you decide an LLC is the way to go, make sure you respect the legal formalities. For instance, the flight school should contract with the LLC for your instruction services, rather than with you as an individual. Similarly, if there are student contracts, they should be made with the LLC and not with you as the instructor, says Gary Zwick, an attorney and CPA with Walter & Haverfield in Cleveland. Make sure the LLC has its own bank account, and deposit your income into it before distributing it to yourself, he says. "That way," notes Zwick, "you've done the best you can to protect yourself from liability for nonintentional or noncriminal acts."

Remember, however, that while the appropriate business entity can protect you from liability that may arise as a result of a mechanical error, liability arising from a defect in the aircraft or the act or omission of an employee or a contractor that your school hires, it offers no shield against the consequences of your own personal acts or negligence. "This is a point that is lost on many professionals, and it bears repeating," Whitlock stresses. "The entity will insulate you from the acts of others, but it will not protect your personal assets from your own bad acts." If you want to protect your assets from your own malpractice or negligence, it is possible to create an offshore asset-protection trust and transfer the ownership of your assets to it, Whitlock says. "These trusts do not save any income or estate tax, they are merely asset-protection vehicles aimed at slowing down or stopping future creditors from taking all your personal assets as a result of a judgment against you," he adds. In order to be effective, such a trust must be created before any bad act occurs. Also, it can't be used to inhibit existing creditors, as that would be fraudulent. "However, if this is created before an accident occurs, it will allow you greater protection" in the unfortunate event that one occurs, he says.

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Karen E. Klein is a Los Angeles-based writer who specializes in covering covered entrepreneurship and small-business issues.

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