Owning horses can be a serious business for some people or a pleasant hobby for others. There is no legal requirement that a horse operation must be classified as a "business," but if you plan to operate a commercial boarding stable, give riding lessons, breed or race Thoroughbreds, sponsor an Olympic hopeful, or get favorable tax treatment, establishing your horse operation as a business is the first logical step.
There are a variety of ways to own and operate a horse business, from the very simple to the very complicated. The process can be as straightforward as setting up shop on your own as a sole proprietor or as complicated as forming a "C" corporation with officers, directors, investors, and a maze of attendant paperwork. There are advantages and disadvantages to each type of ownership, and your first step should be to consult an attorney and an accountant for advice on the most suitable course of action. There is no one "best" way to own a business, and the approach you choose will depend on the facts and circumstances unique to the situation.
You should keep in mind that this is a very broad definition of "business." A single horse, for example, can be the owner's entire business.
Determining the best way to operate a horse business is not a task to be undertaken lightly. Some of the basic questions that should be asked and answered before deciding on an ownership structure include:
1. Is the business property located within one state? If not, it may be necessary to take into account the laws of multiple jurisdictions in planning a business.
2. Who will own the business?
3. In what state(s) do you intend to do business?
4. How many people will make day-to-day management decisions? Who are these people?
5. How much hands-on participation does the owner, or owners, along with others who may invest or join in the business, want to have in operations? Does that vary at all according to the tasks being considered? For example, is one person more interested in or suited for leading trail rides? Providing physical care for the horses? Financial record keeping? Communicating with the public about the business?
6. If the owner has children, are they adults? Will they participate in the business for a short while or do the children want to stay in the business for a long period?
7. Have you identified anyone else with a similar business from whom you might be able to gain advice (preferably not a direct competitor)? Have you actually consulted such a person?
8. Will adding this business to an existing farm operation require an initial investment of capital on your part? How much can you afford to invest initially in this new business? Are investors necessary?
9. What are the long-term goals for the business and for the owners personally? Does everyone involved share the same goals? Have you talked about these things, or have you just assumed everyone has the same goals? Are the goals attainable? Do they also provide some measure of challenge?
10. How risk averse are you and any relevant others, such as your spouse and potential investors? Do you agree on the amount and types of business risk you are willing to accept?
11. Have you given any thought to a business plan?
12. Have you established a business relationship with a veterinarian and a farrier? Will they be available on a regular basis to provide care for horses your horses?
13. Have you opened a separate bank account for the new business?
14. Have you applied for the appropriate federal employer identification number (EIN) for the new business? Do you already have an EIN for an existing farm operation?
15. Have you applied for account numbers with any relevant state and local taxing authorities?
16. Will the added business affect in any way your obligation to participate in federal and/or state unemployment or worker's compensation programs?
17. Have you obtained or developed a satisfactory method or system for keeping track of the time you spend on the business, as well as the revenue and expenses?
18. Do you have any plans to expand the scope of the business in the future? For example, do you anticipate getting into areas such as breeding or racing? If you anticipate getting into breeding, have you considered the market you want to reach? Are you talking about breeding horses for pleasure riding or ranching, or to compete/race?
19. If you have considered getting into the business of racing horses, how will you acquire such horses? Do you understand the mechanics of claiming race purchases in your state? Do you know how auctions work? At this point, have you considered the possibility of joining or forming a partnership for the specific purpose of buying a share of a racehorse?
20. Are you familiar with the concept of syndicates, in which you can participate as co-owners with others by contractual agreement as to capital to be raised; interests in the specific horse to be sold; method of decision making; responsibility for income, expenses, and tax consequences; and liability of investors (which is unlimited)?
With answers to these questions as background information, the next step should be preparation of a sound business plan.
The Business Plan
Economists generally agree that failure to have sufficient capital in hand at start up is the most common reason small businesses fail. This risk can never be eliminated. It can be reduced substantially by coming up with a sound business plan, including a realistic assessment of anticipated income and expenses before launching a business. A comprehensive business plan should be a necessary requirement for any business. No matter what the business or the ownership entity selected, the more advance planning, the better.
Optimism and a positive attitude are valuable attributes for a business owner--up to a point--but a business plan should be realistic. A business plan is more than wishful thinking about the success of a new venture. The business plan should be a sensible assessment of your goals, along with an objective and detailed outline of how you are going to attain them.
A well-drafted business plan doesn't dictate every decision, nor should it. A business plan should direct a business, not micromanage it. The plan should reflect your goals and general business philosophy, however. Consider a business plan as a road map with the main routes and hazards well-marked but with sufficient flexibility to allow for a few hopefully pleasant side trips.
Your business plan should include, at a minimum, the following:
- How the business will be owned
- How the business will be financed
- Projected income and expenses
- Tax considerations
Some other considerations for a business plan might be:
- Is it in writing?
- Does it adequately identify the business goals and objectives? The purpose of the business?
- Is the business form you've chosen allowed in your state? Have you spoken to any advisers about this yet?
- Does the business plan list types of advisers to be consulted? This could be an important tax-planning issue.
- Does it explain where you will obtain the initial capital needed to begin the investment? Does it state how much capital you need to invest?
- Does it identify how you will find and secure the business of clients? Does it explain how and where and how often you will advertise the availability of your services?
- Does it give you a time-line of some sort, so that you can compare your intended progress to your actual progress?
- Does it estimate projected income and expenditures for the next year? Two years? Three years?
- Does it specify how long the business will last? Common choices are "in perpetuity," meaning that the business will continue indefinitely, or "for a term of years," such as ten or twenty.
Although the type of ownership logically should be the first item listed in a business plan, it should not be the first planning decision made before starting a new business. Instead, questions about financing, projected income and expenses, liability, and taxes should be resolved first. The answers to those questions may point to the best or in some cases the only practical ownership option.
About the Author
Milt Toby is an author and attorney who has been writing about horses and legal issues affecting the equine industry for more than 40 years. Former Chair of the Kentucky Bar Association's Equine Law Section, Milt has written eight nonfiction books, including national award winners Dancer’s Image and Noor. He teaches Equine Commercial Law in the University of Louisville's Equine Industry Program.
POLL: University Equine Hospitals