Equine Law: 5 Reasons to Perform a Legal Audit

Tax season is fully upon us! This is a great time of year for a legal audit of your horse business — equine lawyer Kjirsten Lee explains five good reasons why.

Flickr/Rick Bisio/CC

Flickr/Rick Bisio/CC

Down the hall from my office is an accounting firm and judging by the traffic in and out of their door recently, it must be tax season again! While you are counting up your assets and finalizing your business’ profits for 2015, it is a good time to consider a legal audit.

Most small businesses – including horse businesses – are mostly concerned with their bottom line, and can neglect fully protecting their assets. As a result, a business might become aware of a problem for the first time either when litigation arises or if the business is being sold. A legal business audit helps businesses be proactive by cleaning up documents and addressing areas of weakness. Here are a few things a legal audit can cover:

1. Organizational structure. An attorney conducting a legal audit looks at several things under this category. Among other things, they will consider whether the business is in the proper form of an organization – sole proprietorship, LLC, corporation, etc. They will also look at the business formation records, any record-keeping policies and whether there are any affiliates and joint ventures associated with the business.

2. Human resources. All business owners know how important it is to have good people working for you! A great example is boarding barns – owners depend on reliable, knowledgeable staff to make sure every horse is properly taken care of and any boarder concerns are promptly and effectively addressed. When an attorney conducting a legal audit looks at human resources documents, they will go over employment policies, employee handbooks and materials, employment contracts, non-compete agreements and more. They will also consider whether individuals are properly classified as employees and independent contractors – a crucial distinction for employment law purposes. The attorney will also review any procedures and practices for compliance with applicable federal and state laws.

3. Tax forms. When you file your taxes, isn’t it nice when you have all the necessary documents in one place? A legal audit can help you assemble those documents to help you breeze through tax season like American Pharoah. The attorney conducting your legal audit will look at any applicable tax-exempt status, under which many non-profit organizations are classified (for instance, all 501(c)(3)s, including second-career organizations such as CANTER and the Retired Racehorse Project; therapy organizations such as We Can Ride; and rescue organizations). The attorney will also look at any unrelated business income and applicable taxes, including sales tax, employment tax and workers compensation tax.

4. Contracts & leases. As with all businesses, equine businesses enter into legal agreements with individuals and other businesses all the time. A trainer might lease a training facility or a boarding barn owner might lease equipment for making hay. Additionally, there are contracts for almost anything involving horses: sales, leases, breeding, training, buying, selling, having a trainer buy or sell a horse for you and so on. The legal audit will go through every contract and lease agreement with a fine-tooth comb, identifying any weaknesses in the documents and ensuring that your business complies with the representations and warranties made within the documents. The attorney conducting the legal audit will also look for any business relationships not covered by written agreements.

5. Business succession plans. Like all businesses, horse businesses can only go on if there is someone to run them. In conducting the legal audit, an attorney can help you plan for the future. They might review an existing business succession plan or be able to draft one if you don’t have one in place. This can also be a good time to talk about any estate planning needs you may have, both as a business owner and as an individual.

Having an equine lawyer conduct a legal audit helps you as a business owner take the reins on planning for your business’ future. An equine lawyer understands the similarities and differences between equine businesses and other businesses. In the horse world, there are still a lot of handshake deals, which can get you into trouble down the road. A legal audit is a relatively painless, proactive measure to help you as a business owner make sure that you are doing everything you can to protect your business – just like we do everything we can as horse owners to protect our horses.

For more of Kjirsten’s articles on equine law, click the #EQUINE LAW hashtag at the top of this page, or click here to open a list.

Kjirsten Lee, J.D., is an equine attorney with rb LEGAL, LLC, in Golden Valley, MN. She has written on topics such as the Horse Protection Act and use of drugs in racehorses, as well as general legal issues that horse people may encounter. You can follow her on Twitter at KMLee_Esq. Kjirsten and her OTTB, Gobain, compete in dressage and eventing.

Disclaimer: Nothing in this article is intended to be legal advice. No attorney-client relationship is created  by reading and/or commenting on this post. If you are seeking legal advice, please contact an attorney directly.

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