General Farm Partnerships

Article

19 July, 2018

A Partnership is an arrangement where two or more interested parties agree to cooperate their assets and skills to advance their mutual interests. These interested parties can be individuals in their personal capacity or alternatively be corporate entities or even partnerships themselves.

Many farms are run by way of a partnership and this type of structure comes with many benefits. A key advantage of establishing your farm as a partnership is that the partnership does not have to pay corporation tax, which currently stands at 19% in the UK. If you were to set up your farm as a limited liability company, corporation tax would be charged on all profits of the company. Upon the distribution of profits to directors and shareholders such distributions would then be subjected to further tax, by way of income tax. In a partnership, rather than the profits being taxed, the profits are distributed as arranged in the partnership agreement, and then taxed only once as an income tax, which is subject to the variable tax rates dependent upon the level of income. A partnership is also generally easier to form, manage and run and partnerships are less strictly regulated than companies. Providing all of the partners can agree the partners will have full control of how the business is run and so partnerships are often far more flexible in terms of management.

Despite these advantages it is incredibly important to know the correct way to govern and to run the partnership as otherwise this can be disastrous for the success and future of the partnership. The most fundamental point being to have a well drafted and considered partnership agreement in place between the parties.

This agreement forms the basis of how the partnership works, for instance deciding how to distribute profit, deciding the operating hours of the business, who the key decision makers are, how shares can be transferred and how partners are to be disciplined in the event of a breach or other misconduct.

If a partnership does not have an agreement in place, then it is governed by the Partnership Act 1890. This act is almost 130 years old and is extremely outdated. For example;

  • According to the Partnership Act 1890, all profits and losses must be divided equally, no matter how the workload or interest of each individual partner differs.
  • Any partner can dissolve the entire partnership by notice to the other partners with immediate effect at any time. The assets must be realised and the liabilities paid.
  • If any partner dies the entire partnership must be dissolved and assets realised and liabilities paid.

By way of example, consider that in your farm partnership you may have three generations of one family. If a younger member of this family who was a partner wished to exit the partnership and so wasn't pulling their weight, without a partnership agreement such an individual would be entitled to continue to draw equal remuneration to those participating fully in the business and there would be no clear exit route. Such a situation could result in the failure of the partnership.

A partnership agreement could set out;

  • Determining who owns particular assets. Modern farming paves the way for more intricate, powerful and most importantly, expensive machinery. A partnership agreement can determine exactly who owns which machinery and who is liable for it.
  • Determining the value of partnership interest. A share in a partnership is incredibly difficult to define. Unless an already established contractual agreement states otherwise, the best approach is to analyse what a partner would receive upon the liquidation of the partnership.
  • Determining how common tax liabilities are calculated if the partnership contains one or more companies as well as individuals.

It can also offer each individual partner security in that no one partner can go about dissolving the agreement at any time. Serious business decisions have to be decided upon by either a majority or unanimous vote.

It may be that you already have a partnership agreement in place. Existing partnership agreements can run for many years without being reviewed or updated to accurately reflect the current state of the business and so it is equally important that existing partnership agreements are reviewed at regular intervals. In particular, every time a significant decision is taken the agreement should be thoroughly reviewed to avoid messy situations in events such as retirement, conflict, divorce or death of a partner. The agreement can be altered at any time provided all parties to the agreement agree, but once there is a dispute, such agreement can be difficult to secure. Our advice is that partnership documents need to be reviewed annually while relations and communications remain good.

If you would like to enquire about farm partnerships or partnership agreements further please contact our agricultural expert John Pickervance on John Pickervance or alternatively call him on 0333 207 1134.

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