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Finding the right structure for farming businesses

30 May 2022

The great majority of farming businesses operate as unincorporated partnerships – but how many of those involved with running them have ever stopped to think why?

The easy answer is tradition, especially if it’s a farm that goes back several generations.  Informal arrangements between different members of the same family or farmers working adjacent pieces of land can, and often do, become ‘partnerships’ without the need for any formal arrangements to be put in place.

An unincorporated partnership comes into existence where two or more parties act in business together with a view to making a profit.

No formalities need to be observed for an unincorporated partnership to be created and no written agreement needs to exist – the partnership simply exists when the definition is satisfied.

As a result, many partnerships arise without those involved addressing whether it is the appropriate structure for their particular circumstances. In an environment where so much relating to the farming economy and agricultural regulation is changing, it makes sense for you to consider whether an alternative option might be more appropriate for your farming businesses.

Without a written agreement, unincorporated partnerships are governed by the Partnership Act 1890, which may bring unintended consequences, particularly in a situation where only one partner remains following retirement or death.

All partners also have unlimited liability in respect of any partnership debts, which means that their personal assets could be exposed to enforcement of the partnership’s debts.

This may be a critical factor if you have considerable assets outside the farming business which you do not want to be exposed to its debts.

If you have nothing written down to prove what’s included in the partnership, how can you prove that a particular asset is not?

Depending on your particular circumstances, there may be benefits to considering alternative corporate structures, such as a limited liability company or limited liability partnership (LLP).

Field, handshake, farming businesses, sunset

Such structures bring the benefit of being a separate legal entity to its shareholders (or members), which means that the liability of such individuals is limited.  The limited company or LLP can enter into contracts in its own right.

The decision over which business structure is best to use will often be tax-led.

For example, a limited liability company is taxed separately to its individual shareholders. For many, this often outweighs the additional administrative and regulatory burden of running a limited company, such as the requirement to file annual accounts at Companies House.

The Stamp Duty Land Tax cost at the outset of incorporating a limited company is also a relevant factor, though the potential for longer term tax efficiency is often very attractive, and when it comes to an exit (such as a sale), it can sometimes be more tax-efficient to sell shares than assets as an individual.

If your current partnership arrangements are informal, speaking to your professional advisors about the different options available to you is the best first step to take.

If you investigate the options and decide to remain as an unincorporated partnership, it’s essential to, at the very least, get a formal written agreement in place.

That way, everyone knows where they stand and can prove what assets are and aren’t included within the partnership, and you aren’t unwittingly storing up potential problems for the future.

For advice on all aspects of agricultural and rural law, please contact Ben Jackson or any member of our Rural team on 0191 232 8345.