Why your horse business' llc may not protect your personal liability across state lines

LLCs: Considerations when Doing Horse Business Out-of-State

Doing horse business in other states?

In the highly mobile, transient equine industry, many create and utilize limited liability company entities in their home state.

So, what happens to the protections and advantages of your LLC, formed in one state, when you conduct business in another state?

Avoid Potential Equine Law Headaches this Winter in Florida

If you operate your horse business outside of Florida for most of the year but winter in Florida, like many equestrians running equine operations, this may apply to you. Commonly this scenario can cause equestrians a legal headache.

For example, a New Jersey LLC’s sole member comes to Florida and sells a horse to a Florida buyer in Florida on behalf of a New Jersey LLC. Later, the Florida buyer claims that the horse was not as represented or warranted by the New Jersey LLC seller. Buyer accuses the member of fraud, among other claims.

After negotiations prove fruitless, the Florida buyer commences suit in Florida, not against the New Jersey LLC entity, but against the individual member of the New Jersey LLC for the seller’s damages. Florida is the proper jurisdiction and venue because of where the events took place and other related reasons. Therefore, the New Jersey individual member cannot get the case dismissed in Florida.

Next, the New Jersey member attempts to dismiss the suit in Florida, claiming that the proper party defendant is the New Jersey LLC, not the LLC’s member. The problem for the individual member is that the member did not register the New Jersey LLC to do business in Florida before the equine purchase and sales transaction.

Consequently, that LLC’s member cannot intervene the New Jersey LLC as the defendant. That’s because the New Jersey LLC is not entitled to avail itself of the court system or laws of Florida for a dispute arising out of that equine sales transaction. So, the New Jersey individual member has lost the protection of its New Jersey LLC entity. That’s because the member undertook LLC business in Florida without first registering the New Jersey LLC to do business in Florida.

Now, the sole member of the foreign LLC is left defending personal liability to the Florida buyer.

 

Limited Liability Company (LLC)

First, let’s look at the LLC or limited liability company. A limited liability company is a company structure that, when formed and operated correctly, in many cases, limits the liability of the individual members of the company to their membership interests in the LLC. It can prevent personal liability for the debts and liabilities of the LLC (although there are some exceptions, such as fraud or criminal acts).

In comparison, a partnership or unincorporated sole proprietorship doesn’t protect the owners. In fact, the business and owners are considered one and the same for liability exposure.

Further, an LLC is treated as a “pass-through entity.” That means that the revenue and expenses of the LLC are taxed only once. For a single-member LLC, the member’s tax return shows those figures.

In a multi-member LLC, members file a partnership return called a form 1065. The LLC issues a Schedule K-1 to each member for their allocation of the profits and losses.

Every LLC is created under the law of the state in which it is formed. That means that an LLC formed in New Jersey is not an LLC that is recognized as having the right to do business in another state — like Florida. That is unless that New Jersey LLC registers to do business in Florida.

Foreign LLC Registration

Most states have a mechanism where an out-of-state or foreign LLC can register annually to do business, for a minimal fee, in another state. Why register and pay that fee?

Because if the foreign LLC or its members want to avail themselves of the protections and rights of the laws of the other state where that LLC is doing business as a foreign LLC, it must declare it is doing business there first. Finally, a registered foreign LLC will publically designate a registered agent which is entitled to receive notice of any lawsuit initiated against the LLC.

Confused? Don’t care? Let’s take a closer look at how this may apply to your LLC doing horse business across state lines.

Failure to register LLC

Worse yet, even if the foreign LLC failed to register and then was sued in a non-home state, that non-registered LLC is subject to process and could unknowingly be defaulted in a lawsuit against because it is not notified.

Finally, the New Jersey LLC member cannot retroactively cure the problem by registering the New Jersey LLC to do business in Florida. It is the status of the Florida registration at the time of the event triggering liability that governs. This is distinguishable from a foreign LLC bringing a claim as a plaintiff in Florida courts and then assigning its claims to its own after-formed Florida LLC and moving to substitute a proper party.

So, unless you first register your LLC to do business in another state, your home-state LLC may not afford you the LLC protections and rights you expect.

Finally, you will not be able to invoke the laws and utilize the courts of that foreign state to place your home-state LLC structure between you and someone suing you.

 


 

Avery S. Chapman, Esq., is the founding member and inaugural Chairman of the Equine Law Committee of the Florida Bar. He is the principal of Equine Law Group in Wellington, FL. Click here to learn more