Farm Business Structures Part 2: Should I incorporate my farming partnership?
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.
Most farming businesses involving two or more people are operated as general partnerships. However, we are often asked by clients whether it would be better to incorporate, that is, convert their existing partnership business into a limited company.
There are various advantages to this, including:
- Under a Partnership each partner is personally liable for the business’ debts and obligations and this liability is potentially unlimited. In contrast, a Limited Company is a separate legal entity, meaning it is responsible for its own debts and liabilities, not the shareholders. Unless they have given personal guarantees (for example, to a bank), the owners of a Limited Company are protected from personal liability.
- In a Limited Company, it is possible to separate out the day-to-day management of the business (by the directors) from its ownership (by the shareholders). This can be helpful if, for example, you want to give a child or sibling who wishes to pursue a career outside of the farm the opportunity to retain a passive, financial interest in the business.
- There are more options for raising finance for Limited Companies as they are able to issue shares and/or loan notes to investors.
- If you ever want to sell the business, there are more options with a Limited Company as a buyer can simply buy the shares (as opposed to each individual asset within the business).
- It may be possible to reduce your overall tax burden, though this will depend on your circumstances so you should discuss this with your accountant.
However, incorporation won’t be the right option for everyone and there are disadvantages to be aware of, such as:
- Details of the Limited Company, including its accounts, directors’ names and shareholder details will be available for anyone to access online at Companies House, so there is less privacy as compared to a partnership.
- Companies are required to file certain documents at Companies House, including annual accounts, “confirmation statements” and notifications of any changes in directors and persons with significant control, creating an additional, ongoing administrative burden.
As you will see, there is no single best way of structuring your farming business and you should discuss your individual circumstances with your lawyers and accountants.
If you decide that incorporation is the right way to go for your business, Tom’s next article will consider the process for converting your existing Partnership into a Limited Company. In part 1 of this series, Tom also talked about the perils of not having a written partnership agreement.