LLC’s are like corporations in that they protect the owners from liability as long as certain criteria are met in the formation and operation of the LLC. Namely, it is important that the LLC is adequately capitalized, properly insured, that the LLC officers have regular meetings, that minutes are kept for these meetings*, and that the LLC funds are not co-mingled. If these criteria are not met the “corporate veil” which normally protects the owners may be pierced leaving the owners potentially personally liable for the LLC debt or obligation.
   Often, LLC’s are formed with the sole asset being a single racehorse. If, for example, that horse becomes injured and substantial veterinarian bills are incurred, there may be some potential liability exposure to the owners even with the LLC structure in place.
   Further complications arose with LLC liability since until recently the California Horse Racing Board rules failed to recognize LLC’s. This created opportunities for argument that LLC’s in the racing industry should be treated as general partnerships leaving the owners vulnerable to personal liability. On September 13, 1998, and at the urging of TOC, the CHRB rules 1505 (2) and 1506 were amended to recognize LLC’s.
   In this writer’s opinion, LLC’s should soon replace partnerships as the most ideal method for horse ownership in our industry. LLC’s better provide limited liability to all owners, like corporations. Unlike corporations, however, LLC’s are taxed favorably like partnerships. Furthermore, like partnerships, LLC’s allow flexible income allocation structures for unequal portions of stable or horse ownership. Finally, unlike limited partnerships, several or all of the owners can fully participate in the management of the stable or horse without incurring personal liability for obligations incurred by the LLC.
   To properly set up an LLC is relatively simple. In California, the owners must enter into an “Operating Agreement” which is similar to a partnership agreement. Next, they must file an “Articles of Organization” form along with a $70.00 filing fee and an $800 Franchise Fee with the Secretary of State. Finally, a “Stable Name Application” along with Articles of Organization’s title page and $300 filing fee, must be submitted to the CHRB.

* Note: While insurance, regular meetings, and minutes are not required to establish and operate a LLC, the writer recommends them.

(This article first appeared in the April 1999 issue of Owner's Circle and is reprinted with permission of Thoroughbred Owners of California )

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