What defines a farming partnership?
Under the Partnership Act 1890, a partnership is defined as: “the relation which subsists between persons carrying on a business in common with a view of profit.” In simpler terms, if two or more individuals work together to run a farming operation and make a profit, they are likely in a partnership—even if they don’t have a formal written agreement.
A key point is that the existence of a partnership is based on facts, not personal declarations. Without a written agreement, the default rules in the Partnership Act will apply, which can sometimes lead to complications. A written partnership agreement helps clarify roles, responsibilities, and expectations among partners, ensuring smoother operations and fewer surprises down the road.
What should a farming partnership agreement cover?
A well-crafted partnership agreement is more than a simple profit-sharing plan. It should address a variety of scenarios and establish clear guidelines:
• Profit and capital-sharing ratios: Define how income and capital profits will be divided among partners.
• Changes in partnership: Lay out procedures for what happens if a partner retires, becomes incapacitated, or passes away.
• Valuation and payouts: Detail how a former partner’s interest will be valued and paid out.
• Property classification: Clearly distinguish between partnership property (assets owned by the business) and separate property (assets owned individually by partners outside the business).
• Dispute resolution: Establish methods for resolving conflicts to maintain a positive working relationship among partners.
Is incorporating a farming partnership the right move?
Incorporating a farming partnership means transitioning it into a company. While partnerships have their merits, incorporation offers several advantages:
• Limited liability: Partners in a traditional partnership are personally liable for the business’s debts. Incorporating into a company creates a separate legal entity, meaning the company assumes its own liabilities. This structure reduces personal financial risk for the individuals involved.
• Flexible roles and ownership: Partners can become directors, shareholders, or both, allowing for a more tailored management and ownership structure.
• Access to financing: Companies often have more borrowing options. They can offer fixed or floating charges to lenders, making it easier to secure funding.
• Simpler business sales: If you plan to sell the business in the future, an incorporated structure provides flexibility. Buyers can purchase the company’s shares rather than dealing with the complexities of a partnership sale.
What are the practical considerations of incorporating?
Incorporation involves a number of steps and decisions. Key considerations include:
• Tax implications: Incorporation can offer tax benefits, but it’s essential to consult with tax advisors to understand potential savings and obligations.
• Asset Transfer Agreement: This document lists the assets that will be transferred from the partnership to the company and outlines how the partners will be compensated.
• Reviewing contracts: Contracts with customers and suppliers must be examined to ensure compliance with any clauses triggered by the change, such as change-of-control provisions.
• Employee transfer under TUPE: The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) protect employees’ rights during the transition from partnership to company. Following these regulations is a legal requirement.
• Lender consents: Any existing loans or security arrangements need to be reviewed. Lenders may require new security agreements once the partnership becomes a company.
• Governance documents: A shareholders’ agreement and updated articles of association should be established to regulate the rights and responsibilities of the company’s shareholders.
Transparency vs. privacy
Incorporating a farming partnership does increase transparency, as details about the company’s directors, shareholders, and financial accounts are filed with Companies House and become part of the public record. While some may find this public visibility uncomfortable, it’s a necessary trade-off for the benefits that incorporation offers.
How Moore Barlow can help
Whether you choose to maintain a traditional farming partnership or transition into an incorporated entity, the key to success lies in careful planning and sound agreements. A detailed partnership agreement ensures clarity and fairness, while incorporation provides new opportunities for liability protection, financing, and operational flexibility.
By working closely with Moore Barlow’s corporate solicitors and other financial advisors, you can determine the best structure for your farming business and set it on a path toward long-term sustainability and growth.
