Advice on establishing a group

[JoshCritchley]

Ok - I've done a lot of searching on PPRune, but it may be that the question I have is actually so stupid no-one has yet asked it.

As you know, Mak and I are thinking of buying this new citabria and setting up a small group of people (3 or 4).

My question is - I know you can form a ltd company, issue shares, treat the capital as directors' loans etc...but for a small group like this one - do you need to?

But if you don't, who actually owns the aircraft. I mean obviously you all do (pro rate to your investment) but how do you evidence that? And do small groups just write up a basic modus operandi to work from?

Apologies if these questions have been asked before, but searching hasn't yet turned up what I need.

Cheers guys.

:)

[Genghis the Engineer]

The CAA requires you to register a list of owners with them, with name, address, nationality and percentage ownership in each case.

I've been in several groups, and set one up - I've yet to be in one set up as a company.

G

[JoshCritchley]

Thank you very much for that. I can't be the only person to ask these dumb questions (am I?!):confused:

There must be demand for a small volume to be published on the subject!

[FNG]

If I recall correctly, Genghis is writing one, or at least is thinking of doing so.

ChiSau, apologies, I owe you a PM. I will be back in my office tomorrow and will send you some sample costings etc then.

[Justiciar]

You can have a group as a company limited by shares or by guarantee, or you can have it as an unincorporated body. I am treasurer of a group which is a Company. To be honest, there are no real advantages over a simple association and several disadvantages, such as having to file an annual return and accounts, all of which costs money, as well as having to generally comply witht the Companies Acts on matters such as meetings and resolutions.

With a company, the company itself usually owns the aircraft and the members of the group are shareholders if it is a company limited by shares or are simply 'members' of the company in a guarantee company. The company maintains its list of shareholders or members in a register. The company still has to notify the CAA of beneficial ownership, just as would an unincorporated group. In the latter, one or two people are registered with the CAA as trustees, though this is just for the purposes of the ANO and does not define the legal ownership. To qualify for cost sharing under the ANO, article 130, everyone has to have at least a 5% share, meaning no more than 20 members per group or company.

ChiSau1: I have just completely redran my own group's constitution so if you need something to work with let me know.

[IO540]

ChiSau1

The way forward depends to some degree on whether

(1) you have enough dosh to buy it yourself, and are just looking for others to contribute towards the fixed costs

(2) you can afford to buy it but can't afford to keep it, so you need the others

(3) you cannot afford it at all yourself

Most groups you see around are (2) or (3). But with (1) and your question suggests that might be possible, you have better options. It looks like a certified aircraft, cost around £60k, and they normally come (new) with a Transport CofA so you can rent it out.

You can set up a ltd co., put the money into it as an interest-free loan (not forgetting to register a first charge in your favour at the same time) and get the company to buy the plane. Then you can rent it out to others, and you can pick and choose who can fly it.

The other option is a traditional syndicate where the plane is owned either by the partners directly, or by a ltd co. of which they are all shareholders. That way you get a lot less control but you don't need to put up the cash yourself.

A limited company is a lot better for the renting option because it looks more like a proper business and you've got a much better chance of being able to claim back VAT. Getting VAT back on £60k will pay for a lot of flying, but you can't do that in a partnership - you have to do rental and the renters have to be "arms length" people. You also need to pay for your private flying at the same rate as you charge it out at, to help avoid the benefit in kind issues.

In the end, the operation has to make enough money to recover the hourly costs, and recover enough on top to cover the fixed costs (annual, star annual, engine overhaul, insurance, hangarage etc), and this is the case no matter how it is structured!

Also a ltd co. should protect you from personal liability if someone else has an incident which is not covered, or not adequately covered, by the insurance. Whereas with a partnership, all partners are liable and there is total reliance on insurance. The reason why few people worry about this is that very very few GA incidents involve 3rd party damage. But passenger liability is real.

Just a few starting points to look at...

Justiciar

I think you will find the 5% min shareholding stipulation is only for Private CofA aircraft. A plane on a Transport CofA can have more than 20 partners in the group, or sub-5% shareholdings in a limited company that owns the plane. A Transport CofA permits unrestricted rental, to anybody for any purpose (subject to the renter having licenses/ratings/AOC/etc).

[FNG]

Don't forget that if the tailwheel falls off and bonks one of Monocock's moo cows on the head, the aircraft owner is liable for the cost of a replacement cow (plus a zillion quid for stress) even if it was not the owner's fault (drat those pesky engineers). That's one reason for making the owner a company.

[IO540]

No FNG, in that case the owner of the cow will be talking to the insurance company's lawyers. The value, in the context of liability, of a ltd co. is that if the insurance doesn't pay out, or doesn't stretch to the value of the award, the company can be placed into liquidation, hopefully without its directors/shareholders having personal liability.

A limited company offers little protection unless you have the balls to put it into voluntary liquidation, or walk away from it allowing someone else to do it for you, when facing a serious enough threat.

(There IS some residual value because the likelihood of somebody suing depends on the assets of the party he's going after, and when he finds out it is a limited company whose only assets are a plane worth £40k, plus £10k engine fund, they might not bother).

Then, of course, the company's assets are lost too, so no more aeroplane. Not a good solution then is it for a wheel coming off, and if you are a lawyer you should know a lot better.

[Flyin'Dutch']

Hi,

A limited company is no guarantee that they won't come after you.

But nuff said about that.

I was just going to raise the point that the much maligned PFA has some useful information on its website and that a click here (http://www.pfa.org.uk/clubroom/Groups/index.asp) will help you finding out more information.

There are as many different set up of syndicates as there are groups.

The most important thing is that you find likeminded people who are interested in setting up together with you. The choice of aeroplane is the least important one because, when you get on that will emerge automatically.

Have fun.

FD

[IO540]

FD

I agree that the people must matter the most, as I have learnt when hiring out mine!

But when you say

A limited company is no guarantee that they won't come after you

can you give an example of a situation where a director/shareholder of a ltd co would be personally liable (if not present in the aircraft at the time)?

[Genghis the Engineer]

'tis true, I am thinking of writing a book about syndicates.

Won't happen this month, and is still just a twinkle in my eye - but as I said in another thread a while ago, if anybody has thoughts about what should be in it, or whether it's worth the bother, I'd be interested.

G

[FNG]

Genghis, I think that such a book would probably find a market, but would try to interest a publisher before writing it. If you would like a contributor for a dull legal chapter, I'm always willing to be dull.

IO, my point about the cow with the achy head was that the aircraft owner's liability to people on the ground is strict (not so liability to passengers, which is based on fault), and a company insulates the individual from this strict liability. Granted, if all goes horribly wrong and the insurance doesn't pay or is inadequate, the company may have to be liquidated and the aircraft sold, but it is better to sell your aircraft than to have to sell your wife and kids (arguably).

A director or member of a company would in general have no liability for the careless flying of another group member. If an accident could be proven to have stemmed from a group decision not to fix that big hole in the fuel tank, then liability might be shared. The important point is that liability does not arise merely from one's status as a director or shareholder.

[Justiciar]

An unincorporated group is not a partnership and therefroe there is no joint liability for the acts of one member. There are several court authorities on members clubs, which are much the same, which confirms this. So, the argument that "we'll all get sued unless we are a company" is not correct. On the other hand, directors of a limited company will not have personal liability unless, broadly, the company trades whilst insolvent or the directors are personally guilty of fraud towards the company.

IO540: The 5% share provision is in article 130 of the ANO and refers to the ability of group members to share costs and still be a private flight. Renting an aircraft on a public C of A is rather different, since you are not dealing with remunerating the pilot for the particular flight, which was the basis - I think - of the original post. Indeed, quite the reverse, as it is often the pilot who is paying for the use of the aircraft in that case.

[FNG]

I am not suggesting that, absent a company, everyone is liable for everyone else, as such is not the case. I'm simply making the point that the statutory strict liability applies to the owner of the aircraft.

I agree that an unincorporated group owning an aircraft will not ordinarily be a partnership, because the group members are not engaged in a joint venture with a view to profit (this assumes that the aircraft is only used privately and is not rented out or used for paid instructional work).

[Flyin'Dutch']

I agree that an unincorporated group owning an aircraft will not ordinarily be a partnership, because the group members are not engaged in a joint venture with a view to profit (this assumes that the aircraft is only used privately and is not rented out or used for paid instructional work).

That is an interesting point you raise there and would certainly indicate that if you want to do either of those activities with your asset one would have to cover the liability aspect probably in a more formal way than 'a group'

FD

[IO540]

FNG

Can you elaborate on exactly who is liable?

My understanding is that the pilot and the owner (or operator?) are liable jointly and severally, in all cases, and that while the liability to passengers relies on establishing negligence, the liability to everybody else is strict.

This suggests that a ltd. co. would never protect the pilot, i.e. would never protect the owner if he was PIC at the time. So owning a plane via a ltd co is pointless if the owner of the whole operation is the only pilot. (The advantages on other fronts, e.g. VAT treatment, are lost if there is only one pilot)

The situation where "groups" have been concerned about liability is where they are a formal partnership, as some syndicates are. The reason why there is so much folklore in this area is no doubt because in most cases the insurance simply pays out, and where there are problems, the people affected don't advertise it!

[FNG]

Naturally, the precise answer will vary according to the precise circumstances, and it goes without saying that specific advice will be required in specific cases, but here are some general observations.

When there's an accident which causes damage or injury to someone or something, the person flying the aircraft will be liable if personally at fault, but it is possible to conceive of a circumstance where the pilot will not be at fault. Take the case of a tailwheel falling off. Suppose that the pilot can show that he carefully checked the tailwheel assembly before flight, but, unbeknownst to him, there was a hiddden fault which led to the wheel falling off. Here, section 76 of the Civil Aviation Act 1982 kicks in (I append the text to the end of this posting). The owner has to stump up on account of the stunned cow, whilst the pilot laughs it off in the pub. Strict liability arises in respect of damage to persons, cows etc on the ground.

PS: I am sorrry that we sometimes snipe at each other in these discussions. We really ought to meet up, so that you could take me whizzing through clouds in your machine and I could take you upside down in mine (probably not a good idea if we try this in reverse).

s76(2) and (3) follows:-

Subject to subsection (3) below, where material loss or damage is caused to any person or property on land or water by, or by a person in, or an article, animal or person falling from, an aircraft while in flight, taking off or landing, then unless the loss or damage was caused or contributed to by the negligence of the person by whom it was suffered, damages in respect of the loss or damage shall be recoverable without proof of negligence or intention or other cause of action, as if the loss or damage had been caused by the wilful act, neglect, or default of the owner of the aircraft.

(3) Where material loss or damage is caused as aforesaid in circumstances in which—

(a) damages are recoverable in respect of the said loss or damage by virtue only of subsection (2) above, and

(b) a legal liability is created in some person other than the owner to pay damages in respect of the said loss or damage,

the owner shall be entitled to be indemnified by that other person against any claim in respect of the said loss or damage.

[JoshCritchley]

Thanks for all those thoughts. It sounds like for the size of group I'm thinking about a limited company approach may provide only marginal benefits.

Second dumb question (actually this may be in several parts:O )....

Thinking about the operating costs, I can think of:

1) Insurance
2) Hangarage/Parking
3) Maintenance (50hrs/Annual/Star Annual - did I miss anything/!)
4) Fuel
5) Landing fees/Usage (feel free if anyone wants to rent me a grass strip with a hangar near NW London!!)
6) Engine fund

Again, did I miss anything?

And for those of you who run groups out there - which bits do you roll into an hourly charge (engine fund/maintenance fund/fuel? (is this right - I'm still slightly at a loss why people do this) and which bits do you levy monthly (insurance/hangarage?)

And (I warned you this was a multi-part question :O :O ).....

How much do you build in for an engine fund?! Am I right in estimating that a replacement engine (Lycoming 0-320-B2B) is approximately £10,000 (Flyer - April 2003). The engine has a TBO of 2000 hours, therefore just divide that into £10,000 to get £5 per hour (I'm presuming the cash goes into an interest bearing account therefore I've not inflation adjusted). BUt presumably this doesn't take into account the cost of fitting (no idea) and if it blows up in five years' time....

Help?!

:uhoh:

[FNG]

I've only been in one group so far. We decided to set the hourly rate as: estimated cost of fuel and oil, engine fund, plus a bit extra for contingencies. The monthly charge covers insurance, hangarage, maintenance, companies house (£15 a year), accounts (done for nominal charge or free). People pay their own landing fees (free at the base airfield), club subscriptions etc.

As for the engine fund, with a Lycoming AEIO-360-B2F (injected, inverted fuel and oil) we budgeted for £15,000, fitted, at 1500 hours, and calculated the hourly rate accordingly.

[JoshCritchley]

FNG

Thanks for that - I've PM'd you also.

ChiSau

[IO540]

Chisau1

On a Transport CofA plane there is a 150hr check which costs almost as much as the annual. But if the plane is at say 145hrs and you are only 2wks away from the annual (i.e. it has done 145 hours since the previous annual) it pays to ground it for the 2wks, because the annual is a superset of the 150hr check anyway (and also the 150hr check is a superset of the 50hr check so don't waste money on a 50hr check if the 150hr one is 5hrs away). You’ve got to watch the hours carefully and all pilots need to be briefed on this! You can get a 10% extension, i.e. 5hrs.

There is also a prop fund if it is a VP prop but it isn’t much, a few quid an hour.

It should be clear which costs are hourly based:

Fuel
50hr check
150hr check
engine fund
prop fund
other lifed parts e.g. vacuum pump

and which are fixed costs e.g.

insurance
hangarage
annual
start annual

Each pilot should pay the landing fee there and then. Or you could have an account for fuel+landings at your home airfield and get everyone to cough up say once a month. This is an area where you need to particularly trust people because it has been known for someone to fill up at some far away place in Europe and fly away; eventually the CAA locates the plane on the airfield's behalf and contacts the registered owner...

Yes, the engine overhaul cost needs to include removal/refitting – this is likely to be around £1000.

The hourly rate MUST at least cover the variable (hourly) costs otherwise you are literally losing money on every flight. How you cover the fixed costs depends on the set-up. If you own a plane yourself, you just pay them when they come up, or you can stuff £20 notes into a box with a slot in it, each time you fly :O

In a group, one would estimate annual hours and divide it up, and this is what gives rise to the normal monthly standing order payment - the alternative to that would be a higher hourly rate. There is always a hidden subsidy from higher-hour members to lower-hour members, or vice versa; this cannot be avoided.

If you own/control a plane yourself and rent it out, you need to charge a good excess above the hourly cost, and this will contribute towards the fixed costs (in this case, you will most likely find that if you charge a market-competitive rental, you will need a good 300+ hours of rental a year to cover the fixed costs). And yes, you will get lots of people saying they will do say 50hrs/year when in fact they do just 5, etc… so you need to be able to cover the costs yourself if you need to.

If the engine blows up within the warranty you are OK. Other than that, unexpected repairs need to be paid for somehow, and unsuprisingly this can result in disputes in group owned planes.

Forgot to add: hourly maintenance is based on AIRBORNE TIME. So taxiing time costs nothing (except for the fuel). One could get into a debate about hobbs time etc etc but basically if anyone charges for any ground time (as most schools do) this is just a way to make more money or, putting it another way, to keep the official hourly cost appear lower. It's very difficult to make this fair to all, unless you rent out dry and have a fuel flowmeter!

[Snakecharmer]

Wise words indeed above re careful management of flying hours around the 150 hr / annual mark. Interesting you mention extensions... my frustrating experience suggests that succes there depends on whether or not you're one of the 'chosen few' with your engineer (!)

I have been subjected to the phrase "we don't give extensions for operating reasons" ... particularly galling when the engineers concerned are pretty awful at managing their own timelines / spares ordering etc etc etc... Only extension they'd give was to the calendar aspect (not the hours) due to their inability to get the previous aeroplane out on time. Great. And entirely different to my own ethos when I used to work as a professional engineer... but that was on HMFC's pointy jets!