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In today's economy,
horsemen and women are more likely than
ever to pool their resources to purchase
horses for resale. Trainers and clients
frequently partner on resale horses,
with the client providing the purchase
money and the trainer providing the
labor. Whether the partners intend to
resell the horse quickly or they're
planning to take the time to train a
young horse and bring it along, the
partners' goals are the same: Minimizing
risk and maximizing return.
Why
Partnership is a Dirty Word
For horse co-owners who don't have a
partnership agreement or co-ownership
agreement that effectively limits their
personal liability, each partner has
unlimited personal
liability
for the other partners' actions.
What that means: Partners A and B co-own
a horse. Partner A is a trainer and
Partner B is trainer's client. Partner A
takes the co-owned horse to a show. Due
to Partner A's negligence, the horse
kicks someone in the warm-up area,
seriously injuring them. Like many
trainers, Partner A has a lot of debt
and not much income. The injured party
sues both Partner A and Partner B. The
injured party could collect the entire
judgment from Partner B, even though
Partner A was at fault.
More information
about horse partnerships and liability
Liability Insurance
Can Help, But...
There are several ways to limit horse
co-owners' personal liability. Horse
partners can limit their personal
liability associated with the horse by
purchasing horse owners' liability
insurance. This type of insurance policy
will protect the co-owners from
liability associated directly with the
horse, such as in the example above.
However, horse owners' liability
insurance won't cover debts incurred by
the horse partnership. What this means:
Without Partner B's knowledge or
permission, Partner A buys a custom
saddle for the co-owned horse and then
pays the saddle maker with a bad check. Knowing that Partner B co-owns the horse
and is likely to have more money than
Partner A, the saddle maker sues Partner
B for the cost of the saddle. The saddle
maker could collect the debt from
Partner B, even though Partner B didn't
know about the saddle, because Partner A
incurred the debt on behalf of the
partnership.
More information about horse owners'
liability.
Contracts
are Helpful, Too, But...
Like any well-drafted contract, a horse
partnership agreement or co-ownership
agreement, such as ELS'
Equine Co-Ownership
Agreement form,
serves some very important purposes. It
helps minimize the potential for
conflict among the co-owners or partners
by putting everyone's expectations in
writing before anything happens (bad OR
good!). Who pays for what? Where
will the horse be kept? Will the
horse be shown, and if so, at what
shows, by whom and who will pay for it?
What happens if one of the partners
needs to exit the partnership, or the
majority of the partners want to eject
another partner from the partnership?
Can the horse be sold, and if so, how
will the partners decide when to sell
the horse, how much to ask for it, and
who will have responsibility for showing
the horse to prospective buyers? What
happens if the horse dies or becomes
disabled? A good horse partnership
agreement or co-ownership contract will
cover all of these terms and more.
While a horse partnership agreement can
allocate liability among the partners,
this allocation is only as good as the
partners' pockets are deep. For example,
a horse partnership contract might state
that if one of the partners is sued in
connection with the co-owned horse (and
the other partners are not), that
partner can seek pro rata reimbursement
from the other partners. However, if the
partners who weren't sued don't have any
money, the partner who was sued is left
paying his or her own legal expenses.
Limited
Liability Company Ownership is Often the
Best Solution
Instead of forming a general partnership
to purchase an investment horse, Equine
Legal Solutions typically recommends
that the co-investors who would
otherwise be partners form a limited
liability company (LLC), have the LLC
own the horse, and have the would-be
partners own the LLC. The principal
advantage of this arrangement is to
limit the investors' personal liability
to the amount of their investments in
the horse. If the investors happen
to be sued personally in connection with
the horse, they have a ready legal
defense: They don't own the horse;
rather, the LLC does.
More about limited
liability companies and what they do.
At the same time, the LLC's governing
document, the operating agreement, can
set forth all of the same types of terms
and conditions typically included in a
horse partnership agreement, such as
those discussed above. Like a
well-drafted horse partnership contract,
a well-drafted LLC operating agreement
can help reduce misunderstandings and
set the investors' expectations
appropriately. To cover its exposure to
legal claims connected with the horse,
the LLC can take out a liability
insurance policy and make sure that the
policy also covers the investors (as
owners of the LLC).
Are there
Drawbacks to Forming an LLC?
There is, of course, cost associated
with forming an LLC. The investors will
have to pay the Secretary of State a
filing fee to form the LLC, and unless
they form the LLC themselves, they will
have to pay an attorney to form the LLC
for them. Because most horse investors
don't have the experience and legal
training necessary to draft a
comprehensive LLC operating agreement
tailored to their specific needs, it's
generally a false economy to try and
save money by using a cheap online
filing service to form an LLC for a
horse partnership. The filing services
only do the easy part, which is filing
the formation document with the
Secretary of State, and they leave the
hard part, drafting the operating
agreement, to the investors.
ELS offers LLC
formation for a reasonably priced fixed
fee.
The LLC will also have to file a state
and federal tax return each year.
This means, in most states, that the LLC
will have to pay a minimum state
franchise tax, whether the LLC makes a
profit that year or not. Franchise
taxes range from expensive ($800 in
California in 2011) to not-so-expensive
($150 in Oregon in 2011). The investors
will also have to pay a CPA or licensed
tax preparer to prepare the LLC's tax
returns, or take the time to do it
themselves (if they have the requisite
skills and experience).
When the LLC's purpose has been
completed, the investors will also have
to dissolve the LLC. The cost associated
with dissolving an LLC is typically
quite minimal, however, and it may not
be necessary to dissolve the LLC for
years or even decades.
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