Recent Blog Posts in August 2010

CATTLE AND EQUINE INSURANCE

By: David W. Wynne, JD

     What happens if your client's bull becomes injured, sick or crippled while in your possession and control? Likely the owner will blame you for the injury and seek compensation. What happens if a bull breaks through your holding pens and injures a bystander? Most likely you will receive notice from the injured party that he has retained legal counsel to seek compensation for his injuries.

     As with any small business, it is imperative to protect your assets from personal liability by maintaining adequate insurance coverage for premises liability; worker compensation for employees; and coverage for compensation or replacement of expensive bulls, including mortality; theft; loss of use; and major medical policies.

     In addition to having sufficient limits of coverage, you should determine the proper type of insurance for your business. The prudent stock contractor, owner, stock hauler or trainer should contact a knowledgeable insurance agent to discuss their individual needs and certain types of insurance. Most likely, your current insurance agent will have limited, if any, knowledge of our industry. You should locate an insurance agent who is active in the cattle or equine industry to discuss your liability concerns and policy needs.

     In the above example of the bystander injured by a bull, don't look for your homeowner's policy to protect you because most homeowner's policies contain business pursuits exclusions. Commercial liability insurance should be purchased to protect the stock contractor, owner, or promoter against claims brought by an injured party who claims the professional was negligent. For an extra premium you may qualify for an incidental business endorsement to you homeowner's policy.

     A landowner has an affirmative obligation to warn any lawful visitor on his property of the existence of any known dangerous condition. Without question, maintaining possession and control of bucking stock is inherently dangerous. Accordingly, you are obligated to take reasonable precautions to ascertain the danger and provide warnings as may be reasonably necessary to inform your visitors of the foreseeable dangerous condition. There is no duty to protect a lawful visitor who was adequately warned and advised of the inherent danger. Despite adequate warnings, you will be liable for damages if you act recklessly or with conscious disregard for the safety of your invitees.  

     If you maintain possession of another party's animal, you should purchase and maintain a care, custody, and control insurance policy. Care, custody and control insurance provides protection for the trainer, contractor, promoter or hauling agent in the event an owner claims that the professional was negligent in the care custody or control of their bull. You will only be liable for damages to the bull if you are found to be negligent in the animal's care and control.

     Negligence is determined by an analysis of the facts surrounding the professional's conduct and care of the animal. The judge or jury will try to determine whether the professional was negligent in the care and maintenance of the animal by analyzing what efforts were made to inspect the property, correct any defects or dangerous conditions and whether there was a history or pattern of negligent conditions. 

     By executing a properly drafted training, hauling or boarding agreement containing the correct legal provisions, you can contractually limit your liability for damages, or alternatively, you can place the burden of maintaining insurance coverage on the animal's owner. However, the professional cannot completely limit his liability contractually for damages caused by his, his agents or his employee's reckless acts or negligence. You have a duty to inspect and repair dangerous conditions on your property. If you fail to inspect your premises and make necessary repairs, or if you are negligent in the control and/or training of the animal, you will be held liable and responsible for compensating the owner for damages. If the owner maintains an insurance policy and you are found to be negligent, you most likely will face a subrogation claim filed by the owner's insurance carrier.

     With today's fair market value of bucking bulls, it makes good business sense to always maintain appropriate coverage in the event a client's animal is injured while in your possession. It is important when shopping for an insurance policy to consider the actual value of the bucking stock you seek to insure. Factors to consider are: the animal's purchase price, replacement value; intended use of the animal i.e., futurity or classic competition, breeding or performance. Bucking stock policies are usually written for a one (1) year standard policy term. The animal must be in sound condition at the time the policy is issued. If the animal sustains an injury or illness during the term of the policy, the insurance company will exclude that particular illness, ailment, or injury in order to make the animal sound for policy renewal purposes.

     Finally, don't forget about yourself. Who's going to make the note payment on the ranch or pay the feed bills if you become injured, sick or disabled? If your client's bull injures you during the course of your employment, you most likely will not be able to seek recourse against the owner. Protect your business by purchasing medical insurance and disability insurance.

About the Author

     David W. Wynne is a licensed attorney with 11 years experience. He maintains a private practice in Fort Worth, Texas, focusing in the areas of cattle and equine law, business law and domestic litigation. He is an active trial lawyer and has drafted contracts and provided representation for many stock contractors and promoters throughout the nation. You may contact David at 817-332-2202. 

     This article and the information contained herein are intended to be used as an authoritative guide for the stock contractor and bucking bull breeder. It is not intended to replace legal counsel. This article is intended to provide general authoritative information to assist the reader in managing his or her bucking bull business. The information contained herein should not be relied on as legal opinion or advice. Final determination of the suitability of the information for use by the reader is the sole responsibility of the user. The law varies from state to state and the usefulness of the information contained herein, depends upon and is affected by the laws of the users home state.

Different Ways of Doing Business

By: David W. Wynne, JD

Proper business entity selection is critical to the success of your cattle operation. The prudent stock contractor should seek legal counsel who is knowledgeable in the area of business law and transaction law. In addition to the advice of legal counsel, you should consult with a certified public accountant to discuss the tax treatment of income or losses.

The determination of what entity best meets the needs of your operation depends on your goals, capital limitations, need for immunity from liability and tax concerns. The proper business entity could reduce your tax liability, eliminate or reduce liability exposure and increase your productivity.

        The most common forms of business entities used in the bucking bull business are sole proprietorships, partnerships or syndicates and corporations. Selecting the most appropriate form of business entity for your operation depends upon an evaluation of your current needs, future needs, short and long term goals, and tax implications. Factors to consider when selecting the right business entity include: Nature of your operation; Costs of organizing the entity; Need for a separate entity such as a corporation; transferability of ownership; continuation of the entity following death of an owner; need for protection from liability; Tax treatment of income or losses; and degree of participation of owners.

          Lets examine the differences of the three most common entity forms used in our industry. The simplest business entity is the sole proprietorship. It is owned by only one owner and requires no formal organizational document or government filing. The owner is responsible for taxes on any income or loss and must report the income or loss on applicable IRS forms and include the income on his personal tax return.

          The owner of a sole proprietorship is personally responsible for the debts and liabilities of the business. The sole proprietorship is not a separate entity, so the owner is not immune from liability or possible judgments from lawsuits. The owner of a sole proprietorship should rely upon release and hold harmless agreements and should purchase sufficient liability insurance coverage. The sole proprietorship may operate under an assumed name and may be subject to local and state licensing requirements for their business activities.

         A partnership, syndicate or joint venture consist of two or more people or corporations owning interest in the business. Each partner contributes capital, time, talent, assets or services to the partnership and each partner shares in the profits or losses of the partnership. The partners are not immune from liability and debts of the partnership. Taxable income is reported to the IRS and each partner is responsible for reporting their portion of the taxable income on their individual returns.

          The internal affairs of a partnership is governed by its partnership agreement or in the absence of a signed written partnership agreement then the statutory partnership agreement found in most states business code would apply.

          A corporation is an entity empowered to act as an individual, possessing powers allowed to it in its articles of incorporation or certificate of formation. The individuals involved in forming the corporation transfer money or property in exchange for stock of the corporation. The formation of a corporation is costly and should involve the services of an attorney and a certified public accountant.   

          The corporation's internal affairs, is governed by the laws of its state of incorporation. To form a corporate entity, the incorporator must prepare and file articles of incorporation with the relevant state official, usually the secretary of state. The article must state the purpose for which the corporation is formed. Usually the purpose clause is broadly drafted such as "for any and all lawful purposes".

          Corporations provide immunity from liability for the shareholders and managers as long as the manager was acting within the scope of their authority. Corporate formalities such as shareholder's meetings, minute books and bank accounts must be maintained to prevent a creditor or judgment creditor from piercing the "corporate veil". This can occur if corporate formalities are not maintained, when the corporation is under-capitalized or when the corporation is a mere shell and being used as the "alter ego" of an individual shareholder.

          A sub chapter "S" corporation provides the advantages of limited liability without double taxation. The same procedures for forming a s corporation must be followed as prescribed in the formation of a corporation. Additionally, the S corporation may have no more than thirty-five shareholders and must file the S corporation election with the internal revenue service within 75 days of incorporation.      

         The main advantage in forming an S corporation is to gain the advantages of a corporation such as personal shareholder and manager immunity from liability, but to also have the tax advantages of a partnership. An S corporation avoids double taxation of income. If the S corporation incurs losses, then the losses are passed on the individual shareholders to be deducted against their income. Likewise, profits are passed on to the individual shareholder thus avoiding being taxed both to the business and the individual shareholder.  

          S corporations are often formed for the sole purpose of promoting one bull. If the bull becomes injured and incurs substantial medical expenses, then each shareholder could have potential liability exposure even with the S corporation in place.

          I am of the opinion that the S corporation is preferable over a partnership or joint venture agreement for cattle ownership in our industry. With the inherent danger involved in maintaining and promoting bulls, it is imperative to protect owners from personal liability without problems of double taxation. The income and loss allocation structures can be unequal so smaller investors can purchase less shares of stock while still being able to participate in the management and promotion of the Bull.

          Proper entity selection is imperative to the success of your operation. Operating your business in the wrong entity formation could expose you to unnecessary liability exposure and lead to devastating legal or tax consequences. There are pros and cons attached to each of the entities described above. Professional counsel should be sought before selecting the right business entity for your cattle operation.