Equine Business Options

Operating a private horse farm, where you maintain only your own horses, or a boarding stable, where you board other people's horses and/or give lessons to the public, raises a variety of legal issues. The purpose of this article is to introduce some forms of business entities for an equine enterprise- Sole Proprietorship, Partnership, Limited Partnership, Corporation, S Corporation and Limited Liability Company. Any of these forms of ownership may be acceptable for your business, depending on the type of facility you own (i.e. private or public), the number of participants in the business, activities that are conducted on your property (i.e. riding lessons), tax treatment based on that form of ownership, the extent of your personal liability for business debts and any number of other factors unique to your equine operation.

Sole Proprietorship

This form of ownership is the simplest, oldest and most common form of business ownership in the United States. The sole proprietor is the chief decision maker and is responsible for the success or failure of the business. There are minimal formalities in setting up a sole proprietorship (i.e. no need to file Articles of Incorporation). However, the sole proprietor has unlimited personal liability for obligations of the business (i.e. personal injury claim if someone is injured during a riding lesson) and creditors of the sole proprietorship can attach sole proprietorship assets to satisfy any judgments against the sole proprietor. As well, the life of the business is not perpetual in nature as the business lapses upon the death or retirement of the proprietor. From a tax standpoint, the income and expenses for the business are typically included on the proprietor's individual tax form. For example, Bob has a barn on his property which has five stalls. He has two of his own horses and wishes to board three of his friend's horses to help cut his costs. A sole proprietorship would be a sensible form of business ownership for Bob.

Partnership

The Uniform Partnership Act defines a partnership as "a voluntary personal relationship that may arise informally, the agreement being express or implied, oral or written. A partnership exists when the following five elements are present: an association of two or more persons with legal capacity to be partners carrying on a business, more than a single venture as co-owners for profit." Unless otherwise agreed between the partners, each partner has an equal share in the business. Partners may wish to reduce their partnership agreement to writing to outline such issues as the management responsibilities, rights, duties, capital contributions and privileges of each of the partners. However, the general partnership does not have a perpetual life like a corporation does. General partners are personally liable for liabilities of the partnership. In regard to taxes, partnership income is taxed directly to each of the partners. To illustrate, Ann and Anthony wish to purchase a 2 year old stallion together. They plan on having him trained by a professional trainer and showing him in Western Pleasure classes. They want to split the cost of his care and training and share the profits from stud fees they receive. A partnership would be a good alternative for them.

Limited Partnership

A limited partnership is composed of one or more general partners and one or more limited partners. It differs from a general partnership in two ways: a limited partnership is created by statute and the liability of a limited partner for partnership debts is generally limited to the capital that he or she contributes to the partnership. A limited partner has no participatory management rights in the business and is not active in the day to day operations of the business. From a tax perspective, generally a limited partner's income is taxed directly to him/her. For instance, Joe is a thoroughbred trainer. He wishes to purchase a high caliber 2 year old thoroughbred. He is acquainted with a number of wealthy individuals who wish to invest in a racehorse. Joe, as a general partner, can raise the funds necessary to purchase and maintain the horse through these individual investors who will be the limited partners. Joe will train the horse, be responsible for the horse's day to day care, choose which races he will run in etc.

Corporation

If properly formed, a corporation can protect its shareholders from unlimited personal liability for business debts and tort claims. This is a significant advantage of a corporation over a general partnership or a sole proprietorship. As such, legal liability falls on the corporation, rather than the corporate decision-makers or shareholders. The corporation's existence is perpetual in nature, so the death of one of the principals in the corporation does not cause the business to lapse. Property rights in the corporation are evidenced by the number of shares issued by the corporation and these assets are easily transferable. A corporation is formed by filing Articles of Incorporation with the Secretary of State. The shareholders elect the Board of Directors who run the corporation in broad based policy ways. The Board appoints the Officers of the corporation (i.e. the President, the Vice President) who run the day to day operations of the business. Some disadvantages of the corporation include increased costs for start-up (filing fees, accounting costs) and double taxation. Double taxation of a corporation means that a corporation's earnings are taxed at a corporate rate. When the corporation distributes its after-tax earnings, those earnings are taxed again as the shareholder is taxed on the distribution. For example, Seth, Brandon and Bill want to open a livery stable where they have trail rides open to the public. They plan to purchase land with a stable on it adjoining a forest preserve. They wish to be able to accommodate all levels of riders on the trails, but are worried about potential liability for personal injuries. A corporation would be a practical form of business ownership for them.

S Corporations

The S Corporation derives its name from Subchapter S of the Internal Revenue Code. An S Corporation is taxed similarly to a partnership. The S Corporation as an entity does not pay tax. Rather the shareholders report their share of the corporation's net income on their own individual tax returns. Thus, double taxation is avoided. An S Corporation election is subject to certain limitations such as the corporation cannot have more than 75 shareholders and only one class of stock is permitted. By way of example, Rosemarie wishes to open a riding academy. Her mission is to expose children to the benefits of horsemanship and to teach children to properly care for horses. She has 5 school horses which she personally cares for, teaches lessons and clinics herself and does not have any employees. An S Corporation might be a good option for her.

Limited Liability Companies (LLC's)

LLC's are a relatively new business form which have been recognized by numerous states. LLC's are generally more flexible than S Corporations and limited partnerships. LLC's can protect their owners from personal liability for business debts arising from contract obligations or tort liabilities. LLC's have the flow-through tax benefits and limited liability similar to that of a limited partnership. The owners of an LLC are known as the "members" (comparable to shareholders of a corporation) and the persons who run the operations of the business are known as "managers" (comparable to the directors of a corporation). Instead of bylaws which are the rules that govern the operation of a corporation, the LLC has an "operating agreement". Thus, Seth, Brandon and Bill who wanted to start the livery stable in the corporation example set forth above, may want to consider the use of an LLC form of ownership instead.

In conclusion, this article is not intended as legal advice. Rather, the purpose of this article was to introduce various forms of business ownership. The forms of ownership I have discussed are not meant to be an exhaustive list. Contact an attorney for advice as to the form of ownership which best suits your particular equine operation.

Illinois Equine Activity Liability Act Put to the Test

Recently, on November 23, 1999, the Illinois Appellate Court, Fourth District, issued the second reported court decision in Illinois interpreting the Illinois Equine Activity Liability Act (745 ILCS 47/1 et seq.), which became effective on July 7, 1995. The case is Lessman v. Rhodes, No. 4-99-0262 (Ill. App. 11/23/99) (4th District).

There are 43 states which have some form of Equine Activity legislation, and a number of additional states are currently considering Equine Activity legislation. Court decisions interpreting Equine Activity acts are now beginning to surface, with only sixteen reported court decisions throughout the United States as of the date of this article.

Illinois' Equine Activity Liability Act (745 ILCS 47/1 et seq.) became effective on July 7, 1995. According to the legislative history from the House of Representatives transcription debate, Illinois' Equine Activity Liability Act, then Senate Bill 240, was introduced as a "Bill for an Act to limit the civil liability of persons participating in equine activities". Recently, on March 31, 1999, the Illinois Appellate Court, First District, issued the first reported court decision in Illinois construing Illinois' Equine Activity Liability Act. The case is Carl v. Resnick, No. 97-3627 (Ill. App. 3/31/99) (First District, Third Division).

The facts of the case are as follows. Plaintiff, Judy Carl, was riding her horse on a trail in the Cook County Forest Preserve. In the opposite direction, defendant, Shelly Resnick and her friend, Kathy Paddock, were riding horses owned by Ms. Resnick. The three riders met on the trail and stopped to talk. During that encounter, the horse Ms. Paddock was riding kicked at plaintiff, Judy Carl, and her horse. The horse's hoof struck Ms. Carl's leg and caused her injury. The plaintiff, Judy Carl, brought a civil lawsuit against defendant, Shelly Resnick, alleging 2 counts, one count for negligence and one count for a violation of the Animal Control Act. At the trial court level, both the plaintiff and defendant filed motions to resolve the case in their favor. The trial court judge ruled in favor of the defendant, Ms. Resnick, on both counts, based on the Illinois Equine Activity Liability Act. The plaintiff, Ms. Carl, appealed the trial court's decision, and the Appellate Court reversed the trial court's decision.

In its written opinion, the Appellate Court reviewed the purpose of Illinois' Equine Activity Liability Act which is set forth in Section 5 of the Act as follows: "The General Assembly recognizes that persons who participate in equine activities may incur injuries as a result of the risks involved in those activities. The General Assembly also finds that the State and its citizens derive numerous economic and personal benefits from equine activities. Therefore, it is the intent of the General Assembly to encourage equine activities by delineating the responsibilities of those involved in equine activities." The Appellate Court reviewed the "equine activities" sought to be "encouraged" in Section 10(c) of the Act: Those "equine activities" are: "(1) Equine shows, fairs, competitions, performances, or parades that involve any of all breeds of equines and any of the equine disciplines, including, but not limited to, dressage, hunter and jumper horse shows, grand prix jumping, 3 day events, combined training, rodeos, driving, pulling, cutting, polo, steeplechasing, English and western performance riding, endurance trail riding and western games and hunting. (2) Equine training activities, teaching activities, or both. (3) Boarding equines. (4) Riding, inspecting or evaluating an equine belonging to another, whether or not the owner has received some monetary consideration or other thing of value for the use of the equine or is permitting a prospective purchaser of the equine to ride, inspect or evaluate the equine. (5) Rides, trips, hunts or other equine activities of any type however informal or impromptu that are sponsored by an equine activity sponsor. (6) Placing or replacing horseshoes on an equine." The Court found that the Act encourages these "equine activities" by providing an assumption of the risk defense in Section 15 of the Act to defendants involved in "equine activities" sued by persons injured while engaging in one of the equine activities listed in the Act.

The Appellate Court commented that the Illinois Equine Activity Liability Act resembles Equine Activity Liability Acts passed in other states and that most of those Equine Activity Liability Acts would not apply to the recreational riding at issue in the present case. The Court found that the Ms. Carl's complaint against Ms. Resnick was not precluded by the Act because Ms. Carl's recreational riding of her own horse in the forest preserve at the time of her injury was not one of the "equine activities" sought to be "encouraged" by the Act.

The Appellate Court went on to find that the Animal Control Act still applied to the case because it was not preempted by the Equine Activity Liability Act. The Appellate Court stated that a plaintiff must prove 4 elements under the Animal Control Act to prevail: 1. an injury caused by an animal owned by the defendant; 2. lack of provocation; 3. the peaceable conduct of the injured person; and 4. the presence of the injured person in a place where he has a right to be. The Appellate Court, relying on the defendant's testimony during her deposition, stated that the plaintiff, Ms. Carl, did not do anything to provoke Ms. Paddock's horse. Accordingly, the Appellate Court found against defendant, Ms. Resnick, on the Animal Control Act count and sent the case back to the trial court to resolve the issue of damages under the Animal Control Act as well as to try the issue of liability and damages as to the negligence count of the plaintiff's complaint.

Horse Show Participant Fails to Prove Willful and Wanton Conduct by Horse Show Sponsor

Recently, on November 23, 1999, the Illinois Appellate Court, Fourth District, issued the second reported court decision in Illinois interpreting the Illinois Equine Activity Liability Act (745 ILCS 47/1 et seq.), which became effective on July 7, 1995. The case is Lessman v. Rhodes, No. 4-99-0262 (Ill. App. 11/23/99) (4th District).

In April of 1996, Dean Lessman, participated in a horse show which was sponsored by Trail Riders Association, Inc. [Trail Riders] in Moweaqua, Illinois. While Lessman was warming up his mare in the arena, another show participant was riding a two year old stallion in the arena, which kicked Lessman above his left ankle, breaking his tibia and fibula.

Lessman sued Trail Riders alleging negligent and willful and wanton conduct. Lessman also sued the rider of the stallion, Dave Parks, and the owner of the stallion, James Rhodes.

In Lessman's complaint against the defendants, he alleged that approximately 15 minutes prior to the occurrence, Parks' stallion had attempted to kick another horse, attempted to mount another horse, and was generally being difficult to handle. Lessman alleged he was unaware of the stallion's dangerous behavior and was riding past Park's stallion when the stallion kicked, hitting his leg.

All of the defendants to Lessman's action filed motions to dismiss the case in their favor based on the Illinois Equine Activity Liability Act, which they argued only allowed recovery for willful and wanton acts. The Trial Court dismissed all counts in favor of the defendants, except the willful and wanton action against Trail Riders.

The plaintiff, Lessman, alleged Trail Riders was willful and wanton for "(1) not checking into the background of the horses registered for the show; (2) not monitoring the behavior of the horses; (3) not requiring stallions to be shown at separate times and in separate classes from other horses; (4) allowing all horses to be prepared and shown at the same time; and (5) not requiring red ribbons to be placed on the tail of horses that were "kickers" as was the social rule among horse shows". Trail Riders eventually moved for the lawsuit to be dismissed in its favor because Lessman failed to prove his allegations that Trail Riders engaged in intentional or reckless conduct. The Trial Court ruled in favor of Trail Riders, and Lessman appealed the Trial Court decision to the Illinois Appellate Court.

The Appellate Court reviewed the purpose of the Illinois Equine Activity Liability Act, which is set forth in Section 5 of the Act "The General Assembly recognizes that persons who participate in equine activities may incur injuries as a result of the risks involved in those activitiesTherefore, it is the intent of the General Assembly to encourage equine activities by delineating the responsibilities of those involved in equine activities". The Appellate Court also reviewed Section 15 of the Act, which states that "It is recognized that equine activities are hazardous to participants, regardless of all feasible safety measures that can be taken. Each participant who engages in an equine activity expressly assumes the risk of and legal responsibility for injury, loss, or damage to the participant or the participant's property that results from participating in an equine activity, except in specific situations as set forth in Section 20 [of the Act], when the equine activity sponsor or equine professional may be held responsible'.". The Appellate Court noted that Section 20 of the Act provides an exception to the general rule of immunity and permits liability for an equine activity sponsor that commits an "act or omission that constitutes willful or wanton disregard for the safety of the participant, and that act or omission caused the injury." Section 20 (b) (4).

The Illinois Appellate Court looked to the Illinois Local Governmental and Governmental Employees Tort Immunity Act and the Illinois Civil Pattern Jury Instructions for the definition of "willful and wanton conduct". In the Tort Immunity Act, "willful and wanton conduct" is defined as "a course of action which shows an actual or deliberate intention to cause harm or which, if not intentional, shows an utter indifference to or conscious disregard for the safety of others or their property." 745 ILCS 10/1-210. The Illinois Pattern Jury Instructions, Civil, defines "willful and wanton conduct" as behavior "which, if not intentional, shows an utter indifference to or conscious disregard for the safety of others." Illinois Pattern Jury Instructions, Civil, No. 14.01 (3d ed. 1995).

The Appellate Court concluded that the Trial Court had properly awarded summary judgment in favor of Trail Riders because Lessman was unable to prove that Trail Riders' conduct had risen to the level of willful and wanton conduct. The Court found that Trail Riders had not done anything differently than any other horse show sponsor would have done. Lessman presented no evidence at the Trial Court level that any equine activity sponsor, within the state of Illinois or any other state, had rules which required a horse show sponsor to conduct background checks into horses, separate or exclude stallions from participating in shows, or require "kickers" to wear ribbons on their tails at the time of Lessman's accident. The Appellate Court found from the Trial Court's record that Lessman had conceded that he was unaware of any such rules at the 10-15 horse shows he had attended. The Appellate Court also found that defendant, Park, and the President of Trail Riders, had no knowledge of such rules existing at any of the horse shows they had attended. Thus, the Appellate Court found the "lack of a customary practice of separating or excluding stallions to be a good indication Trail Riders did not act recklessly or with conscious disregard to Lessman's safety".

The Appellate Court commented that their "holding is consistent with the intent of the Act. The very purpose of the Act is to encourage equine activities by protecting equine activity sponsors from excess liability due to horse-related injuries. The legislature recognized the hazardous and unpredictable nature of riding and showing horses and sought to shift the risk from sponsors to participants except for intentional or reckless behavior. We find Trail Riders did not act recklessly and Lessman's injury was the type of injury that the legislature contemplated when it placed the assumption of the risk upon participants."