Becoming a successful owner requires thorough preparation, continuing education and common sense. Every owner can become a knowledgeable and successful manager if willing to take the time to learn about Thoroughbred ownership.
Always operate your horse business with the same level of business savvy that has afforded you the opportunity to become a Thoroughbred owner.
Generally speaking, the level of investment is the primary consideration in determining the most appropriate means of becoming an owner. Determine the total amount of money that you are willing to allocate to this investment. Develop a budget, identifying the amount to be utilized for the initial purchase, and obtain realistic estimates of daily expenditures.
Unfortunately, to answer this question you will need to ask yourself: How involved do I intend to be? Will my schedule permit me to spend time monitoring my equine investment? For example, do you have the time to talk with the trainer, or to visit the stable area, racing office or track kitchen on a daily basis?
The level of investment and amount of time you have to spend on your equine activities should guide you in determining the appropriate form of ownership. TOBA recognizes, however, that personal preferences and past experiences may be equally important. Obviously, there are advantages and disadvantages to each form. What level of control do you wish to maintain? Are you the type of individual who must call all the shots, assume all the risks, and have all the glory? Or, are you the type who prefers to spread the risks and share the rewards?
How long are you willing to wait for a return (not necessarily financial) on your investment? Are you looking for the immediate action offered by racing or the long-term challenges of breeding and developing young horses? Thoroughbred racing and breeding offer both types of investment opportunities, challenges, and more!
If immediate action is what you desire, then your investment opportunities will be quite different from those interested in breeding and developing young stock. However, the opportunities are not mutually exclusive. You may consider diversifying your investment by purchasing a filly as a broodmare prospect, breeding her and selling the offspring, acquiring a stallion share, and/or owning horses of racing age.
It seems that every owner wants to be able to see their horse as often as possible, but that is practical for only a very few. However, if having convenient access to your horse is imperative, then you must think and act regionally. On the other hand, given that some states offer more lucrative racing and breeding programs, you may wish to consider how those programs could impact your investment. State owners' and breeders' organizations can provide a complete explanation of their respective state-bred incentive programs.
Everyone wants to own a classic winner. Unfortunately, not all horses have the ability to compete and win at the top level. There are many levels at which you can participate (i.e. the claiming, allowance, or stakes levels). You can compete on a regional and/or a national level. An owner's financial resources ultimately dictate the level at which one competes. Again, if action is what you want, your strategy will be different from someone seeking the classic horse. You will likely spread your money out over a larger stable, with more horses racing on regional circuits. If your goal is to find the big horse, you might have fewer horses which race less often.
Remember, the thrills of owning a claiming horse or breeding a maiden winner often match those experienced by the owners of more accomplished horses.
A written business plan will help you stay focused, as well as assist in demonstrating active participation in the activity. Tax regulations and business sense require that you make the investment with the intent to make a profit.
In creating a business plan, remember that neither Thoroughbred racing nor breeding are static activities. A sound business plan is not necessarily an elaborate plan; however, it should be in writing and should:
Is it a sole proprietorship, a corporation, a limited liability company, a general or limited partnership? If you opt for the latter, you should list the partners. Each form of business entity has specific economic and income tax attributes which should be considered in order to select the appropriate form of business for your particular circumstances.
Besides the goal of having fun, is the business geared toward breeding to race, breeding to sell commercially, racing with hopes of developing breeding stock, racing to make a profit and sell at the end of its racing career, etc.?
Depending upon the circumstances, it may be appropriate to identify, by name, the professionals consulted, including a brief outline of their credentials.
Will the horses be acquired through auction, claims, or private purchase?
Will the business operate on a regional or national basis?
Create a preliminary budget with reasonable projections. Budget line items should include, at the very minimum, purchase price; depreciation; typical operating expenses such as board/lay-up costs; breeding fees; training fees; transportation invoices; veterinary and farrier charges; nomination, starting and entry fees; administrative expenses; insurance; professional services; travel and entertainment, etc.
Depending on the type of equine investment, you should consider obtaining insurance coverage for the risks inherent with that investment. For example, would commercial general liability, mortality, fertility, live foal, or transportation insurance be appropriate?
Do you intend to remain in the business indefinitely or are you limiting the term of your equine business activities? For example, if your goal is to race, you may want to articulate that your intent is to review each horse's performance at the end of each year. Based on that performance, decide whether to continue to race the horse, retire the horse for breeding purposes, or sell.
There are various types of business entities utilized to conduct horse racing and breeding activities. It is important to understand the tax, legal and liability implications of each. The Racing Game suggests you consult with your tax and/or legal advisor before choosing a type of business entity for your equine activity.
Considered the simplest form of ownership, a sole proprietorship is a business owned by a single individual. The owner reports her horse activity revenues and expenses on her individual income tax return and pays the related tax. While the owner enjoys the advantage of making decisions without regard to other investors, the owner is individually liable for all business expenses.
A general partnership is the most basic form of a partnership. Typically, two or more individuals join together to operate as a single business entity. Income tax returns are filed by the partnership, but all gains and losses pass through to the individual partners. Tax treatment of the partners is essentially the same as in a sole proprietorship. The major advantage is simplicity. However, there is no protection for the partners. In other words, all personal assets of each partner, including non-partnership assets, are exposed in order to satisfy liabilities of the partnership.
This form of partnership limits partners' liability to those assets contributed to the partnership. The general or managing partner's liability is not limited. Since the general partner's liability is not limited, he is afforded greater power and control over the partnership assets and responsibility for most decisions. By turning decision-making power over to the general partner, other partners are considered non-active or passive participants. This means your horse operation losses can be offset only against other passive income, i.e., non-earned income and non-investment income. With regard to the partnership, losses can offset future income or can offset any income during the year the limited partnership ceases operation.
As with a general partnership, income tax returns are filed by the partnership. Organizational expenses will be incurred and most states require filing a certificate.
Commonly defined as a co-ownership group, a syndicate is a hybrid form of business entity, similar to a partnership that is created by contract among members of the syndicate. Syndicates are most often associated with breeding and racing ventures. They allow an investor to raise capital and sell interests in a specific asset. Each co-owner's or syndicate member's rights and obligations are defined by contract, with the syndicate manager appointed to exercise management duties.
There are no statutory requirements for such entities. Decisions may or may not be made in a democratic manner, and each syndicate member assumes responsibility for her income, expenses and tax consequences. Investors assume unlimited liability. It is important to note that a member's right to transfer her interest may be restricted. However, by carefully drafting the agreement, and allowing for operational flexibility and adjustments for changed circumstances, many potential pitfalls can be avoided and a syndicate can be a useful vehicle for ownership.
Generally speaking, a corporation is a separate legal entity. It is a separate taxpayer, filing separate returns and pays taxes at corporate rates. It can involve one or more investors or shareholders who, generally, are not at risk for corporate liabilities beyond their investment. Any corporate losses are "locked into" the corporation and cannot be used to offset other income of the individual shareholders.
This type of corporation represents a mix of corporate and general partnership characteristics. As with a C corporation, it can be comprised of one or more investors.
An S corporation generally offers three advantages: (1) shareholder liability is limited; (2) corporate income and losses pass through to the shareholders and are reported on their individual tax returns; and (3) investors can actively participate in the management decisions. S status is elected by the corporation and its shareholders by filing with the IRS. However, establishing the organization requires a professional's assistance and the associated costs could be significant in relation to the investment. Additionally, there are certain technical requirements for electing S status which cannot be met in every instance.
An LLC offers some of the desirable features of a corporation and a partnership, yet eliminates the normal restrictions. The LLC provides for pass-through tax treatment while maintaining limited liability, even for those who manage the business. Rules regarding allocation of gains and losses generally are more flexible than those pertaining to S corporations, and administrative requirements may be less burdensome.
LLCs are recognized in most, but not every, state. Rules regarding their operation and treatment vary. In some instances, it is possible for a limited liability company to be denied its pass-through tax treatment.
LLCs are becoming the entity of choice for many horse owners, but the decision to use this form should only be made after consulting your tax and legal advisors.
Although very similar to a general partnership, the LLP varies in that each partner is not vicariously liable for the wrongful acts of other partners. Only the partner or partners who performed the act that causes harm or incurs an expense are liable for its consequences. Furthermore, partners are able to actively participate in decisions if they so choose.
Pass-through tax treatment applies as it does with general partnerships. The main drawbacks are the administrative requirements and expense. Given that this form of business entity is a relatively new entity, it may not be recognized in all states. Therefore, the limitation of liability may or may not be effective when a limited liability partnership is operating outside the state in which it was created.