Farm Business Structures Part 1 – the perils of not having a written partnership agreement
Tom Potts, from our Corporate team discusses key aspects of agricultural business structuring in a series of articles, providing information on the different options and helping you identify the best option for your farm.
A partnership arises automatically where two or more people operate a business together to make a profit. Partnerships are very common in family farming businesses, often between siblings, parents and children or even neighbours. It is not unusual for these businesses to have evolved naturally without a formal, written Partnership Agreement ever being put in place.
Where there is no written agreement, a piece of legislation from 1890 will step in automatically to provide the legal framework in which the partnership will operate. However, relying on a law designed to cater for the business environment 130 years ago will rarely be appropriate for a modern farming business. For example:
- Where there is no Partnership Agreement, any trading and capital profits (or losses) would be shared equally between the partners. However, this is often not appropriate, for example where one partner has put more money into the business or is more actively involved in the day-to-day farming. Instead, a Partnership Agreement allows you to specify the percentages by which any profits (or losses) are shared.
- A partnership based on the 1890 law will automatically be dissolved if one partner dies or becomes bankrupt and the only way a partner can retire is by dissolving the partnership. A Partnership Agreement will provide an agreed procedure that applies when an individual leaves the partnership which allows the business to continue without interruption.
A Partnership Agreement can also:
- Be essential when borrowing money, as banks will often request a copy of the business’ Partnership Agreement before deciding whether to lend.
- Provide clarity as to what assets are owned by the partnership and which are owned by each partner individually outside of the business. This reduces disputes and assists with claims for Business Property Relief or Agricultural Property Relief from Inheritance Tax.
- Set out a clear procedure for making decisions in relation to the partnership and admitting new partners (such as the next generation of the family) into the partnership.
Tom’s advice would always be to consult a lawyer with experience in drafting Agricultural Partnership Agreements who can walk you through the steps needed to put in place a bespoke document tailored to accurately reflect your farming business’ requirements and future plans. Safeguarding all partners and giving clarity to the position of the business.
As an alternative to putting in place a Partnership Agreement, you may decide that this is time to put your farming business into a Limited Company (or “incorporate” it). Tom delves further into incorporations in part 2, coming soon.