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Structuring an Equine Business

Let’s Talk About That

The first presentation in the UPHA interactive webinar series LET’S TALK ABOUT THAT featured Jen Shah of Dean Dorton, a leading Kentucky-based regional accounting firm, presenting: “Are You Ready for Taxes? Let’s Talk About That.” Sponsored by Equidae Insurance, Ms. Shah’s dialogue shared accounting and tax advice for horse and farm owners.

Within this blog, we’ll share Ms. Shah’s discussion of how to structure horse and farm operations. For those who want to function as a business or owners with personal horses who simply want to limit their liability, the structure of an equine operation can take many different forms. We’ll let Ms. Shah take it from here….

Sole proprietorship, co-ownership or general partnership are the simplest forms of ownership and the only difference is how many members participate. In these structures, net income is subject to self-employment tax -- essentially the employer and the employee portion of social security and Medicare. No liability protection exists in these forms of ownership, and you must rely on insurance or other alternatives to potentially limit exposure.

In a SOLE PROPRIETORSHIP, there's no separate business entity. The tax results are reported on the sole member's or sole owner's tax return directly. This works best for a hobby, but if your business is structured this way, make sure that you have separate accounts and you keep everything -- including financial statements -- separate.

CO-OWNERSHIP is quite common in the equine industry. I might own 50% of a horse and you own 50% of the same horse. This business structure may be a GENERAL PARTNERSHIP -- which is much like a sole proprietorship but just with more than one owner. Liability passes through to the owners in proportion to ownership percentages, and, again, there is unlimited liability exposure here, so you'd have to look at insurance to potentially reduce liability exposure.

A LIMITED PARTNERSHIP is much like a general partnership, but it does have limited liability if it is handled correctly. All the losses or the income of the activity still flow through to the partners’ returns, and it's still treated as a flow-through entity but there is a separate tax return filing requirement. It’s just another way of operating in a partnership format but with limited liability.

An S CORPORATION entity also flows through to the individual shareholders’ returns, but it's less flexible than a partnership in that special allocations aren’t allowed in an S corporation. This is a popular entity type for those in service businesses like trainers, blood stock agents and sales consigners with little potentially appreciating assets in the business because it can be used to reduce the owner's exposure to self-employment income. In an S corporation, net earnings are not subject to Social Security, Medicare, or self-employment tax. There is a requirement, however, for an S corporation to pay a reasonable salary to its owner, but any salary or any net earnings beyond that reasonable salary would pass out to the owner and is not subject to self-employment tax.

An S corp is also a little bit less flexible getting appreciated property out of the corporation. For instance, if we believe a farm or horse might appreciate substantially, we wouldn't typically structure it as an S corporation, because if you distribute appreciated property from an S corp, it is taxed at the time of distribution as if you received the proceeds. Whereas on the partnership side, that is typically not the case if you have enough basis to absorb that distribution. Again, an S corp is primarily for service-driven businesses like trainers, consigners, bloodstock agents, etc.

A C CORPORATION is a non-flow through entity so the net income or loss does not flow to the owner’s tax return. It is its own tax-paying entity, and a C corporation currently pays a 21% federal rate plus a home state rate if net profits are generated. Any dividends that are distributed out to shareholders are also taxed at the shareholder level so there may be a double-layer of tax if cash is distributed out of a profitable C corporation. C corporations aren’t used very much by horse and farm owners for this reason. Where they are used quite a bit, and quite commonly, is for non-US farms and non-US horse owners. That’s primarily to avoid the non-US individual shareholders or companies having to file US tax returns as well.

The most common entity structure in the horse industry is a LIMITED LIABILITY COMPANY or LLC. An LLC can take the form of any of the items listed above. If there is only one member, the LLC is a disregarded entity. A disregarded entity is a business entity that is legally separate from its owner but is ignored for income tax purposes. The IRS will allow the owner of a disregarded entity to report the business’s income, losses, credits, and deductions on their personal tax return. This distinction structures the equine business the same as a sole proprietorship, but it limits liability. Therefore, a huge benefit of having a single member LLC is reducing liability exposure, but it's still taxed directly on the owner’s tax return.

An LLC can be a partnership if it has more than one owner or the LLC can elect to be a C or an S Corporation. So again, there are quite a bit of LLCs in the equine business because they really take the form of whichever entity the members or the owners so choose.

Any business structure depends on individual variables, and I encourage you to discuss your specific situation with your advisor first before making any decisions regarding your equine operations.

Jen Shah is Tax Director at Dean Dorton and leader of the accounting firm’s Equine Industry Team. She provides tax and operational planning to a variety of equine industry participants including breeding and boarding farms, veterinary firms, and many associations. Ms. Shah’s credentials are extensive, and she is a much sought-after speaker and panelist at numerous events including the Thoroughbred Owner Conference, the Consignors and Commercial Breeders Association, as well as the University of Kentucky’s National Conference on Equine law.

The one-hour tax webinar “Are You Ready for Taxes? Let’s Talk About That,” featuring Ms. Shah and sponsored by Equidae Insurance, is now available on-demand to UPHA members through their website: https://www.uphaonline.com/. We encourage UPHA members to visit this website and access a library of Equidae -sponsored webinars with topics ranging from retirement planning to structuring a business to insurance hot topics. For non-UPHA members, stay tuned to this page as we bring some of these topics to you.

The views, information, or opinions expressed in this blog are solely those of Ms. Shah, and do not necessarily represent those of Equidae Insurance.

For more information about equine or farm insurance, or if you have a topic you’d like to see covered in our blog, please contact us directly at: Equidae Insurance, Inc. 608 Virginia Street East, Suite 302 Charleston, WV 25301 p. (304) 346-1198 f. (304) 345-3535

Stacey Halloran, Agent
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