Many farming businesses involve different generations of the same family working on the farm, notes Alistair Millar, an agricultural lawyer at Tallents Solicitors. Working with family can make a lot of sense as shared values tend to lead to shared visions for the continuing future of the farm. But, for a farming business to be successful in the modern world, formal legal agreements, such as a Partnership Agreement are eminently sensible, even between family members.
What is a Partnership Agreement?
Alistair Millar, Senior Partner
Even though you’re working with family, as soon as two or more people are working together in business to make a profit, a partnership may automatically be formed. In the absence of a written Partnership Agreement, the partnership will be governed by the Partnership Act 1890 (the 1890 Act), which is not necessarily a problem until it is invoked.
At that point, without a written Partnership Agreement, the business will now be subject to legislation that was written more than 130 years ago, and that basic guidance is not always fit for purpose when applied to today’s modern farms.
What are the benefits of a Partnership Agreement?
Aside from providing a legal basis for decision making and protecting the interests of everyone involved in the business, a written Partnership Agreement will clearly:
- Define the conditions of the partnership.
- Define the duties and responsibilities of the partners in the day-to-day management of the farming business.
- Show how the profits and losses will be split.
- Set out the ownership of the assets belonging to the farm.
- Identify the owners of the land.
- Give details of the bank accounts, borrowing or lending relevant to the business.
- Outline the succession plan for the business, including what happens if a partner is incapacitated, wishes to retire, or passes away.
- Outline the roles younger generations can take in the business before the older partner is ready to retire.
- State what happens in the event of a dispute and how they would be resolved.
A written Partnership Agreement also has financial and tax-planning benefits. Defining the assets belonging to the partnership could also reduce inheritance tax (IHT) by allowing Agricultural Property Relief to be applied of 100% or 50%. Additionally, certain business assets could be passed on at a reduced or 0% rate of IHT while alive, or via provision in a will.
What happens If we don’t have a Partnership Agreement?
As stated before, the farming business will be subject to the 1890 Act if there isn’t a Partnership Agreement in place. For example, some of the major implications are:
- Profits and losses will be divided equally amongst the partners, no matter the input or effort put in by each partner.
- The partnership can be dissolved at any time, just by serving notice on the other partners. At this point, the farming business would have to cease trading while its assets are realised to pay off any outstanding debts and any surplus is then distributed amongst the partners.
- Partners cannot be easily removed from the partnership by the other partners.
- If one of the partners dies, then under the Act the partnership will be automatically dissolved, again leading to the business having to cease trading while matters are settled.
Alistair finishes:
Tallents Solicitors have been working closely with farming families in Nottinghamshire and Lincolnshire since 1774 and have extensive experience in drafting robust Partnership Agreements specific to the farming industry. Our agricultural legal and tax experts are here to help farming businesses get appropriate Partnership Agreements in place which will best suit their farm’s circumstances.
