samc

I'm a CFI. Rather than pay for liability insurance to protect my assets, should I incorporate?

My company treats us as independent contractors, they don't even deduct Social Security.

Does anyone have any experience in this area? The way I understand it (from college buisness law) I would limit my liability to only the value of the LLC. That wouldn't be much considering my paychecks!!

Plus I suppose I could write off expenses.

HSLD

Good topic! Maybe our resident hotshot lawyer could comment on this. It sounds like it might be a good move if you are working as an independent contractor.

Ewfflyer

Dang, this actually is a great idea if it works. Bad thing is liability is just one good lawyer away from being nothing you can protect against anymore.

vagabond

Hmmm, giving up before even trying! It's not that bad of an idea. I'll write up something on the different types of business formations. There are many different ways to form a business, ranging from the simple to the unnecessarily complex. Whichever kind you choose depends on your own special circumstances, business goals, tax considerations and tolerance of risk.

rickair7777

If you have a lot of assets to protect, that might be good. Otherwise insurance is probably cheaper and easier.

I use one for real estate, my state charges $800/year plus I have to pay taxes on any earnings and do some paperwork.

You would need to ralk to a lawyer; don't try to set one up on your own, you will screw it up.

You could use one for instructing also

vagabond

Sole Proprietorship - this is the simplest of business formations. It is a business owned by one person (you) and it is not registered with the state as a corporation. However, there may be local registration and business license or permit regulations with which you need to comply. Many freelance people or independent contractors are sole proprietors. One disadvantage of the sole proprietorship is that you can be held personally liable for any business-related obligation or debt. So take Joe's Air Limo Service for example. It's business is to fly customers from one small airport to another. You work for Joe's as an independent contractor pilot and you have a supplier of your aviation needs such as uniforms. Let's say you bought some uniforms, but you defaulted on payments because Joe did not pay you that month. This supplier is now your creditor and can legally come after you and your personal assets, which include your car, house and bank accounts. In community property states such as Washington, California and Texas, some creditors also name your spouse in these claims and lawsuits. For tax purposes, a sole proprietor is not a separate legal entity from the person who owns it. You will need to fill out Schedule C of IRS Form 1040.

Partnership - is a business owned by more than one person and has not been incorporated or organized as an LLC. There are two types of partnerships - general partnership and limited partnerships. In a general partnership, each and every partner has equal management duties, and each is also personally liable for all business debts, defaults, obligations and court judgments. Some partners can have limited personal liability, but only if the partnership was set up as a limited partnership from inception. For tax purposes, a partnership is not a separate entity from its owners. The IRS considers a partnership a "pass through entity" meaning the partnership itself does not pay any taxes, but the income or profits "passes through" to the partners who then report their share of profits or loss in their own individual tax returns.

Corporation - is a business that has been incorporated and the complex paperwork properly filed. Once properly formed, the owner's personal assets are shielded from the corporation's creditors; creditors can only go after corporate assets, so you could lose only the money you have invested in the corporation. There are some exceptions to limited liability, the most important of which is when you treat your corporation more as a personal extension, instead of a separate legal entity that it was meant to be. Another important disadvantage of a corporation is the difficulty in running it. You need to be meticulous in keeping paperwork, need to have regular director meetings, etc etc ad nauseum. The major tax disadvantage of a corporation is that its profits are double taxed. This means that the corporation, as a separate entity, pays taxes on its profits, but the partners also pay taxes in their individual tax returns.

Limited Liability Company - is a company that protects owners from personal liability much like a corporation does, and uses the "pass through" aspect much like a partnership does. In an LLC, setting it up is more difficult than a sole proprietorship or partnership, but much easier than a corporation. You create an LLC by filing an "articles of organization" with the state. There is a small filing fee. An LLC is a good choice if you are particularly concerned about personal liability. Check with your state if a CFI can form an LLC (some states prohibit certain professions from forming an LLC).

Other than perhaps the Sole Proprietorship, these are not trifle decisions. Consult a good business or contracts lawyer before proceeding.

vagabond

I would be remiss if I did not write about the legal ramifications of an independent contractor vs an employee. Outwardly, they may appear the same, work side by side with each other, and oftentimes do the same job, but they have quite different legal rights and privileges.

An independent contractor is generally characterized by the following (the italicized ones are usually most critical difference, at least according to caselaw):

Provides consulting services to more than one company
Sets his own hours
Works out of his own office
Does not receive employment benefits from the employer
Works relatively independently
Has authority to decide how to accomplish tasks, usually without input from employer
Incurs the costs associated with performing the job
Acquired the specialized skills with particularized education and experience
Is not subject to tax or FICA withholding; pays own self-employment tax
Is not eligible for unemployment compensation benefits upon separation
Is not eligible for worker's compensation benefits if injured on the job
Is paid according to the terms of the contract; does not receive OT
Is not entitled to join or form a union

vagabond

Don't mean to be anal and technical, but the liability is limited to the money you put into your LLC.

Pilotpip

Vagabond, thanks for the useful info!

Liability is one of the reasons that I left my old flight instructor position to go back to my Alma Mater. After seeing the way the former employer handled an incident I determined that he'd hang anybody out to dry to save face.

In college I took an aviation law class taught by a regional captain who had a law firm specializing in aviation. One thing that stuck in my mind from that class: Juries aren't aviation experts. They don't understand why your 152 doesn't have radar. Be careful out there kids.

samc

Thanks for the input. I am trying to get an idea of the paperwork monster in AZ before I go in and start paying for people's time and help. It seems it may be an option, but I'll have to do some research on the insurance side of things.

Those characteristics of an independent contractor are interesting... I have to tred lightly though because you never know when your boss reads...