Before making the transition from racetracker to owner, before claiming that horse you’ve been eyeing, before you even fill out your application to own, there are questions to be asked of yourself. You are entering a whole new world of business, one which will easily, and seductively, consume as much time, energy, passion and money as you care to give it. In order to be effective player, you will need to devote some significant percentage of your time to managing, decision-making, tracking and learning about your new avocation: can your bank account, your friendships, your other businesses, and the well-being of your family life afford this new commitment?
If, to whatever extent, the answers are “yes,” you have several styles or forms of doing business to choose from – sole ownership, private partnership with friends, public partnership, limited partnership, corporation, association, syndicate – and some are more consuming than others.
Regardless of which style you choose, perhaps the most important bit of advice that veteran owners can give in this regard is: start small, and go slowly at first.
Before you make too costly or permanent a commitment, give yourself time to find out if you have the time for this avocation, to discover whether you enjoy the art and the challenge of owning a racing stable, and to see if you’re comfortable with the on-going costs which are inevitably involved (see chapter on “Operating Costs”).
The third bit of wisdom we have to offer is this: before making the decision on how you are to “do business,” obtain professional advice (perhaps from your accountant) which will take into consideration both your personal assets and your personal goals.
As a SOLE OWNER, OR SOLE PROPRIETOR, of your stable, you can make all the decisions, put your name by the horses in the racing program, and keep all the glory (not to mention the purses). On the other hand, you (and your estate) will be personally responsible for paying all the bills and defending yourself from (or else absorbing) all the liabilities incurred by your stable.
As a PARTNERSHIP – General, public or private (also limited: see below) – you will operate not under your own name, but under either a stable name or an agreed-upon, codified and registered grouping of names. [An important legal note: your name cannot be listed in a partnership (even in the program) or printed in connection with a stable, if you are also operating as a “sole proprietor” in the racing business! The use of your name is, per the CHRB, strictly an either/or proposition.]
In any version of partnership, your horse will race under silks jointly selected by you and your partners. The silks selected – and the order of names on the program – cannot be changed on a race-by-race basis. Both your trainer and the clerk of the course must have an accurate record of each horse’s silks and ownership “roster” in order for that horse to be entered in any race.
Partnership is by far the most popular form of ownership, since it allows participation in the thrills and inside experiences of thoroughbred racing without a drastic individual investment. Although each member of a general partnership must obtain (and maintain) an owner’s license from the CHRB, this form of business allows you and your partners to reduce your individual risks and costs by splitting them. And you can split them according to whatever percentages you agree upon among you.
However, there is always the chance that one or more partners will either 1) default on their share of the bills, or 2) by some action taken in the ordinary course of the partnerships business, incur a debt. In these cases, each of the rest of the partners may be held individually liable for those debts to the full extent of their assets, regardless of agreed-upon ownership percentages. You may also develop, in time, irreconcilable differences among you with regard to the training or racing schedule of your horses. If that happens, you may end up going through a fairly laborious, often costly, and usually acrimonious separation of assets – sometimes even requiring a dissolution, which will mean having to sell all the horses in which you share an interest.
So, even if you form a private partnership with friends – say a group who have long enjoyed going to the races together – be prepared for almost anything. A “pal” is one thing: A “partner,” with trustworthy business practices and the financial resources to fulfill his or her obligations, is another. To minimize the chance of future problems, it would be wise (though you will find most partners don’t bother) to have a clearly defined, written agreement in place before going into the horse business together.
In the case of a Limited Partnership – a very strictly prescribed form of business which must comply with a number of rules laid out by the State – there will likely be one or more “general” partners and one or more “limited” partners. Only a general partner may be licensed as an owner and actually participate in the management of the stable and partnership. The partnership must appoint one or more “managing partners” who have primary management responsibility and are accountable to the CHRB. A limited partner contributes capital and shares in the purses (or “profits,” depending on how the partnership is written) but is not actually bound by the obligations or liabilities of the partnership. Typically, the terms in the limits of “limited” partnerships are formally spelled out by lawyers.
SYNDICATES operate much like partnerships, but there are key qualitative – and financially quantitative – differences between the two. First, the members of a syndicate are rarely “racetrack buddies,” or for that matter even acquainted: they are usually strangers brought together, sometimes from all over the world, by a professional syndicator (you will see advertisements by such individuals in the Daily Racing Form and occasionally even in the “Official Program.”) Second, a syndicate is usually formed in order to buy a horse of stakes quality – a horse so valuable that not many individuals could afford to buy it outright, on their own. In other words, most participants in a syndicate are people willing to invest a great deal of money (but not quite an “outrageous” amount of money) to own a share of a horse well bred enough to win a world-class stakes race. Note that syndicates can own one horse, or several; in the case where there are multiple horses in a syndicate, the members’ sights may not be set as high as, say, the Triple Crown, but the horses are (among them) expected to win stakes races or otherwise pay off (i.e., as future breeders) the “top” dollars it cost to buy them.
As in a Limited Partnership, in a syndicate there is only one CHRB registered participant: the professional syndicator is the equivalent of the “managing partner,” and the members of the syndicate need not be examined by the CHRB (although the CHRB will require a copy of the syndication papers and will keep a record of the names of its members). It is the syndicator who will do the paperwork, make the stabling, training, transport and racing arrangements, and issue to the members of the syndicate the I.R.S. “Form K1” which will be needed for the filing of the members’ individual income tax returns.
Although it is impossible to know whether a given syndicate is a “good bet” (except in the unlikely event you are able to buy into an already existing syndicate with proven horses and proven profits), there are certain measures you can take to reduce your chances of being led down the proverbial garden path. First, do the homework. All thoroughbred bloodlines and racing records, plus the records of their sires and dams, their half-brothers, half-sisters, and every other close relative, are matters of public record. A main office of the Daily Racing Form or a good equine association library (such as the one maintained by the C.T.B.A. – please see Appendices) as well as several online sites will offer up the hard facts on a horse’s potential… but only if you take the time to dig for them.
Second, the syndicator will publish or give you an account of his or her experience, credentials and past performance, and will often include references: check them. Another point of caveat emptor strongly suggests that you make a call to the CHRB office for assurance that the syndicator’s license is current and in good standing.
Third, find out who formally trained the horses and who will be training them for the syndicate: a simple difference in feed or veterinary care can make a real monetary difference in a horse’s “future.” Fourth, if the horse proposed for syndication is foreign born, which many are, you need to carefully check its record (again, via the sources mentioned above) and find out whether its winning races (or its “star” sire’s or dam’s) were run under conditions or with medications that will not apply in the United States (and, more specifically, in California: regulations do vary state by state).
Finally, in terms of a syndicate, keep in mind that the syndicator, once he or she has recouped from syndicate investors the capital laid out for the purchase of the horse, has nothing to lose. As soon as the horse or horses are fully syndicated, they have been fully paid for by the investors (and perhaps already at profit, since you have no way of knowing what the syndicator originally spent for the “product”). Whether or not the syndicator retains a share or percentage is, at the bottom line, immaterial; whether the partners in a syndicate win or lose on the syndicated horses’ performances, the syndicator is, most likely already “in profit.”
Leasing racehorses is a practice that is gaining popularity as an alternative to sole proprietorships, partnerships and syndicates. Although the lessor must still qualify for and pay for a CHRB license, the “hands off” advantages to racehorse leasing are very similar to those involved in the leasing of a car or any other piece of real property. (The disadvantages, likewise, tend to follow that form….)
It may be that leasing’s most attractive quality, in the case of racehorse ownership, is its legitimacy and familiarity to the I.R.S. as a proper “business structure” – yet another beam which points to the fact that tax accounting, for thoroughbred owners, has become one of the trickier parts of the “game.”