Saturday, October 10, 2009

Equine Accounting: Franchises-The more we get together, the happier we'll be

Don't have $150,000 for a Grand Prix horse capable of competing on a national level? Just find 14 friends each with $10,000 to spare and create a syndicate. Is it that easy? No, not really. But syndicates, which have been popular for some time for race horses and breeding, are becoming a useful way to finance the purchase of a competition horse. Several friends of mine who were all students of a well-known dressage trainer combined funds and expertise with other interested parties and created a syndicate to allow the trainer to purchase a very talented horse that he had in training. One of my friends jokingly says that she "owns the tail".
What is a syndicate? A syndicate is a division of ownership. Each shareholder or member contributes a portion of the cost to purchase and/or maintain a horse or horses. Generally, the syndicate's legal form of organization is either a partnership or an LLC (Limited Liability Corporation). What does the Syndicate Agreement include? Generally, the agreement should include:1. the rights, interests, obligation and privilege of each member.2. identification of the animal(s) and where it will be held.3. warrants as to the health and title of the animal(s).4. conditions for transferability of shares.5. designation of syndicate manager and explanation of his/her duties and compensation.6. provision for the tax treatment of the syndicate.7. establishment of liability insurance coverage and in the case of stallion/mare, any warranties of fertility.8. any timelines for when the horse will be sold or the syndicate will terminate.9. explanation of procedure to modify current agreement, if necessary. What is the cost to purchase a share in a syndicate? The biggest variable in determining the cost of a share is the cost of the horse. Another variable is the issue of who bears the cost of future expenses. Many syndicates require that members make an annual contribution for the cost of maintaining the horse - feed, board, vet bills, farrier as well as costs for competition and shipping. However, some syndicates offer their shares at a one-time fee. This is more often the case if the current owner of the horse cannot afford the future costs of training and competing and creates a syndicate to obtain funding to campaign the horse further. In this case, there is no actual purchase of a horse. The revenues from sales of shares are used to fund future endeavors. What are the benefits of syndication? For members, the risk of ownership is significantly decreased. If the horse is not a successful performer or in injured, the loss is only a fraction of the purchase price. It is a relatively safe and inexpensive way to get involved in racing, breeding or competing and provides the opportunity to participate on a much higher level than individual ownership. Some syndicates offer perks such as the opportunity for members to attend select competitions with access to VIP hospitality or to obtain lessons on their own horses at discounted rates. For the trainer/rider, it provides funds to purchase a horse that may otherwise have been unobtainable. Because a syndicate is composed of many members and designation of the trainer has been included in the syndicate agreement, it provides a much more stable relationship for the trainer with the owners and the likelihood of a horse being moved from trainer to trainer is considerably diminished. What about taxes? An attorney, knowledgeable in this subject, is essential. A syndicate is treated under tax laws as either a joint ownership of property or as a partnership. The activities of the syndicate determine how it is treated for tax purposes. When the syndicate is treated as a joint ownership of property, each member files their tax return as a sole proprietor. They report their share of income and expense of the syndicate with no computation of the income and expense of the syndicate included with their return. They can choose the method of depreciation that is most beneficial to their tax situation. If the syndicate is treated as a partnership for tax purposes, Form 1065 K-1 (IRS filing on partnership informational return) must be included with each member's personal return and the method of depreciation is determined by the syndicate. Depending on the activities of the syndicate and the structure of the syndicate agreement, there is the possibility that syndicate shares may be treated as a security would be subject to specific requirements by the SEC (U.S. Securities and Exchange Commission). There are also murky tax issues such as "at-risk rules" and possible tax shelter status. So be sure to have an attorney that represents you look over the syndicate agreement.