Associate solicitor Jack Stephenson, from Harrison Drury’s corporate and commercial team, outlines the importance of having a properly prepared business partnership agreement for your family farm.
Many farms operate their business as a partnership. Even if you run it as a family farm, where two or more people carry on the business with a view to profit, it could automatically be established as a partnership.
Such partnerships are governed by the Partnership Act 1890, which may not reflect the intention of the parties. Therefore, it is important to note that if you and other members of your family have started farming together, a partnership business relationship may have already been formed. This blog post explores the reasons why, under these circumstances, a written agreement is strongly recommended.
Do I need a written agreement for my family farming partnership?
In the absence of a written agreement, a partnership for your farming business may already exist. Even though a written agreement strictly speaking, may not be necessary, we would always strongly recommend that you have one.
It is also common for banks to insist that you have a written agreement. Otherwise, under the Partnership Act, if a partner dies, the partnership will be deemed to have dissolved, which is very impractical and can lead to the bank freezing the accounts of the business.
Other implications of having no written agreement for your farming business include:
- In the absence of a specific provision to the contrary, profits and losses of the business will be divided equally, which could be an issue if certain partners provide more input than others.
- Any partner can dissolve the partnership at any time by serving notice to the other partners. This would result in the business ceasing trading, the partnership’s assets being realised, its debt payed and any surplus being returned to the partners.
- A partner cannot be expelled from the partnership without an express right allowing the other partners to do so.
What should I put in a family farming partnership agreement?
Family farming partnership agreements tend to be a little shorter than partnership agreements between unconnected individuals who are doing business together, due to the relationship between the parties. However, clauses that we recommend should be included in a family farming partnership agreement are:
- How the capital of the business is owned by the partners.
- How profits and losses are split between the partners.
- Duties and responsibilities of the partners.
- What happens when a partner passes away.
- How much notice must be given to retire from the business, and the terms upon which an outgoing partner is paid out.
- You may wish to reserve important and key decisions to certain partners, or require unanimous consent of the partners in respect of certain matters (for example entering into high value contracts, acquiring or disposing of assets or changing the nature of the business).
- What assets used by the partnership, including land, are owned by the partnership or individual partners. It is very important that this is clearly set out in the agreement. You should also consider the tax consequences of transferring land and other assets into the partnership. Harrison Drury works with a range of accountants that specialise in the farming sector and can put you in touch with someone who can assist with tax matters.
Alternative business structures for rural business
Although a partnership is a common structure for farming businesses, other alternative structures include:
- Limited Partnership (LP): LPs are rather uncommon and must be registered at Companies House. In an LP, at least one of the partners restricts their liability for the debts and obligations of the partnership to a pre-determined sum (the limited partners). An LP must also have at least one general partner who manages the business and bears unlimited liability to creditors. A limited partner is not permitted to take part in the management of the partnership.
- Limited Liability Partnership (LLP): An LLP must be registered at Companies House and is effectively a hybrid between a traditional partnership and a limited company. The idea is that it provides the flexibility of a partnership, but the liability of the partners in respect of partnership debts is limited, which can be useful to help ensure that your personal assets are not at risk.
- Limited Company: Such as a company limited by shares, with shareholders and directors.
We would strongly advise that you seek tax advice before deciding which business structure to use and we can put you in touch with someone who can assist with tax matters.
A properly prepared written agreement for your family farming business will help ensure it correctly reflects the ownership of the business between family members and the division of assets. It will also help ensure the smooth running of the farm during any period of change due to family circumstances.
To discuss the structure of your rural business or to prepare a partnership agreement for your family farm, please contact Harrison Drury’s rural sector team on 01772 258321.