Business Entities
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. As always,
consult with your tax and/or legal advisor before choosing a type of
business entity for your equine activity.
Sole Proprietorship
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.
General Partnership
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.
Limited 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.
Syndicate
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.
