non-equity partner

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dhindmanjr
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non-equity partner

Postby dhindmanjr » Fri Apr 10, 2009 10:58 pm

Greetings all,
I good friend and work associate has made a very kind offer to be a non-equity partner\pilot in his airplane, a Cherokee 180. Basically, I would pay the additional amount to be added to the Insurance policy and then an hourly dry rate for the time I fly the airplane. I am a recently minted sport pilot who is pursing the PPL. My friend was one of my mentors in pursuing the SPL. In addition to encouraging me as mentor, he is interested in having his plane flown on a more regular basis and sharing some of the costs of operation. Does anyone have any experience with this type of arraignment? Any sage words of advice from the UCAP gang?

Thanks,
dhindmanjr

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champguy
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Location: Florence, (Coastal) Oregon

Re: non-equity partner

Postby champguy » Sat Apr 11, 2009 12:51 am

Sweet deal.
You may finally want your own plane, and he may at some time want to end the arangement. There should be up front the understanding that it is not forever and that you will end the deal before you loose each other as friends.
Make sure that every time you leave the plane it is cleaner than you found it, and it is ready for him to fly whenever he wants it.
You might well not want anything in writing, rather rely on giving more than you take to make the arrangement work.
Others will disagree.
Remember, not all who wander, are lost.
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PilotBillFromTexas
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Re: non-equity partner

Postby PilotBillFromTexas » Sat Apr 11, 2009 12:12 pm

I completely agree. Sounds like a really sweet deal.

The only other thing will be that at some point you will be flying it and something will break. So, there you are sitting at a distant airport with a crapped-out starter motor, for example. Will he expect you to pay for it because you happened to be at the switch at the time and you are stuck without a way home without paying for the repair or will he reimburse you because it is his airplane and you are just a renter?

Dave Higdon
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Re: non-equity partner

Postby Dave Higdon » Sun Apr 12, 2009 4:42 pm

Bill raises a really important point...something to get clear on before you enter into any kind of "partnership," equity or otherwise...

Personally, seems to me if I'm not an equity partner I'm really just a renter with a great rate and would owe nothing on a non-caused maintenance issue...that is, you didn't do anything to screw up the starter, ergo no liability in getting it fixed...and if you front funds when broken at a remote locale, you gonna get reimbursed? Not wanting you to look a gift horse in the mouth...but when they fly, they wear...when things wear, they wear out...or break...and then they gotta get fixed.

As for the "putting your name" on the insurance, depending on the policy and the underwriter, you may be able to fly, insured, without being a "named insured" on the policy itself -- and that costs nothing...when we still had Air Comanche, we had a couple of friends fly it regularly for gas money...they met the insurance requirements and could fly, insured, without having their names added to the policy -- which would have raised the premiums...so check it out.

Oh, yeah, one last thing to keep this serious: your buddy may want to check the FARs against what he's doing and how he operates the plane; as a "non-equity partner" believe you'd need to be listed on ownership documents somehow to keep your payments from being seen as straight-up rental -- and then the airplane is a commercial item, subject (I believe) to all that goes with offering a plane for rental use, including 100-hour inspections, added paperwork, etc...

Don't mean to rain on a parade, but this seems like so close to a way to get into trouble, however unintended...

So check it out; you wouldn't want this to expose either your friend or you to a violation...

FWIW, though, there are ways to accomplish what he's offering and do it squeaky clean...

Dave

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dhindmanjr
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Re: non-equity partner

Postby dhindmanjr » Sat Apr 18, 2009 11:35 am

Dave, Champguy, and Pilotbill,
Thank you for the input and encouragement, it is much appreciated. Champguy, I really like your point about making sure that we are friends after the deal is over. That is goal number one. Dave, if you have any hints on how to do this "squeaky clean...", i.e., articles, template agreements, guidelines, etc., I could use an initial heading. I searched AOPA, but could not find much on this type of arrangement.

Dave Higdon
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Re: non-equity partner

Postby Dave Higdon » Sat Apr 18, 2009 11:53 am

dhindmanjr -- Well, not sure where to find something like this...but it did seem to me that the easiest, safest way to accomplish this would be for your buddy to do one of two things: see if his insurance policy will let you fly as a qualified pilot without adding your name as additional insured...that's the cheapest, generally; if not, go the additional insured route...then have no paperwork, no contract, no trail that could lead the two of you into any unintended consequences over questions of "renting" or "leasing" or otherwise "paying" to use the airplane. Verbal agreement that you're using for fuel costs and, at most, will split any unexpected maintenance expenses that arise when you're flying. And if you want to kick the guy something extra toward maintenance, etc., make it invisible...like cash; and maybe volunteer to help with maintenance or annuals that owners/operators can legally perform.

Now many a lawyer might say that what I'm suggesting doesn't adequately cover liability and shared-cost issues -- and no question, from a standard-legal position, they're likely correct...my concern would be the special legalities of the FARs...and avoiding anything there that could be construed as evidence of an illegal rental/lease operation that could entrap the owner, more than you...but you, as well.

If you guys are friends enough to do it on a handshake -- as I've done with planes I've owned as well as planes friends have owned -- you can make this work with no such risks...

As said before, I'm not a lawyer; so can't offer any legal advise -- just ideas based on a learned paranoia...

Hope this helps; and really hope it works out for you and your friend.

Dave

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PilotBillFromTexas
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Re: non-equity partner

Postby PilotBillFromTexas » Sat Apr 18, 2009 10:32 pm

I agree that if you two are tight enough whereby he feels comfortable letting you use his plane then a verbal understanding is probably good enough. You might want to get renter's and borrower's insurance which would cover you (and therefore him) anytime you are using someone else's airplane. You don't have to even mention that you're doing it but, God forbid something happens then it might come in handy.

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joemurffy
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Re: non-equity partner

Postby joemurffy » Tue Apr 21, 2009 10:12 pm

Great questions and answers in this thread, and it is hitting really close to home with what I'm about to do. See if this helps or just raises more questions.

I currently co-own a PA32 with a friend I've had for over ten years, and before he ever flew. A little over two years ago we bought the plane, 50/50, and since then we've flown it closer to 90/10, with me on the high-side. We've done all of this on a handshake, including how we will handle the engine replacement, so I know that these kind of agreements can work, although I would still encourage something more formal. The plane has always just been transportation to him and way more of an affair to me. Additionally, I love using the plane to encourage friends to fly more.

To this end I'm about to buy him out and create a flying club. I'll reveal the name of the Club after it is formed. My intention is to be the majority owner of the L.L.C. and sell shares to three other people, albeit very small shares, and then we'll each pay a certain amount for a minimum number of hours each year. This will be tach-based and dry. If they don't use the minimum number of hours they don't get money back since the Club has to cover certain carrying costs and be able to put a small amount in reserve for incidentals. After this minimum number of hours the dry-rate will go down since the carrying cost will have already been covered. So far I can easily beat the Hobbs-equivalent rate of every similar plane in town, but it will only be for four of us (decided on by me) since our insurance will only cover up to four named pilots. For these annual "dues", I'll handle all maintenance cost, including the looming engine replacement; and in the case where something breaks off-field, I'll pay the cost to repair, but getting home is their business.

I've already written up rules that cover getting out, paying for damage, etc. They have gotten extensive, but I think that is good. Now I just need to establish the L.L.C. and figure out how to both buy the second half of the plane and put it into the L.L.C. when it is going to mostly owned by me. Thoughts?
Joe Murphy - KPMV

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Dave Higdon
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Re: non-equity partner

Postby Dave Higdon » Mon Apr 27, 2009 2:31 pm

joemurffy wrote:Great questions and answers in this thread, and it is hitting really close to home with what I'm about to do. See if this helps or just raises more questions.

I currently co-own a PA32 with a friend I've had for over ten years, and before he ever flew. A little over two years ago we bought the plane, 50/50, and since then we've flown it closer to 90/10, with me on the high-side. We've done all of this on a handshake, including how we will handle the engine replacement, so I know that these kind of agreements can work, although I would still encourage something more formal. The plane has always just been transportation to him and way more of an affair to me. Additionally, I love using the plane to encourage friends to fly more.

To this end I'm about to buy him out and create a flying club. I'll reveal the name of the Club after it is formed. My intention is to be the majority owner of the L.L.C. and sell shares to three other people, albeit very small shares, and then we'll each pay a certain amount for a minimum number of hours each year. This will be tach-based and dry. If they don't use the minimum number of hours they don't get money back since the Club has to cover certain carrying costs and be able to put a small amount in reserve for incidentals. After this minimum number of hours the dry-rate will go down since the carrying cost will have already been covered. So far I can easily beat the Hobbs-equivalent rate of every similar plane in town, but it will only be for four of us (decided on by me) since our insurance will only cover up to four named pilots. For these annual "dues", I'll handle all maintenance cost, including the looming engine replacement; and in the case where something breaks off-field, I'll pay the cost to repair, but getting home is their business.

I've already written up rules that cover getting out, paying for damage, etc. They have gotten extensive, but I think that is good. Now I just need to establish the L.L.C. and figure out how to both buy the second half of the plane and put it into the L.L.C. when it is going to mostly owned by me. Thoughts?


The company my wive and I first started in 1995 was an LLC, and the rules vary some according to state...Generally, the people who share in ownership of LLCs are defined as "members" and if memory serves, believe the way "member" participation is handled is in the state paperwork establishing the LLC...as such, strongly suggest consulting with an adviser -- lawyer, SBA mentor or something -- to help and to make sure you can actually establish an LLC with unequal members or members holding different levels of membership.

Sounds intriguing; hope you keep us posted on how this goes.

Dave


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