Family farming partnerships - a brief guide for avoiding the most common causes
Farming families and the businesses they run may have grown over time and sometimes in a fairly adhoc way, but it is never too late to consider the relationships in the operation, especially when a new generation is about to join, or an older generation plans to leave.
Many issues often come to light when the partnership faces a crisis – which could be financial, a family fallout, someone leaving for a new role or due to the death of a family member.
Knowing what issues may come up and how to resolve them can help to give everyone peace of mind and to ensure the continuity for future generations.
Written agreements - why bother?
Do you have a written agreement which sets out how the farm business will be run? If you are a husband and wife team, siblings, cousins, multi-generations etc then it is important (but not legally necessary) to have a documented agreement to enable the business to continue running when one or more individuals leaves the partnership.
At least two people are needed to make up a partnership and this is typically called a general or traditional partnership which is governed by the
Partnership Act 1890. Sometimes unintentional partnerships can occur be created with the absence of written agreements and they could be involved with running different aspects of the business operation.
Partners are jointly and severally liable for the debts and obligations of the farm business. This should sound warning bells, as what if one of the partners decides the business should invest in something which the other party doesn’t agree with?
Each partner has the ability to bind the partnership into contracts with a third party, as well as participating in managing the business and receiving a share of the profits or sharing liability for a loss. The partnership ends on the resignation or death of one of the partners. Each partner is personally taxed on their share of the partnership’s profits.
Without a written agreement then determining how to make important decisions, or which assets are included in the partnership can sometimes cause a disagreement. In this scenario with assets then the law will regard what is brought into the partnership or acquired by the business during the partnership as partnership property. Keeping accurate and up to date farm accounts and records is typically the best way to record this information which can be referred back to and relied on in the event of a disagreement.
Farmland, although essential to the business operation, may legally be owned by one of more of the partners personally or jointly and occupied or used by the partnership under a licence or tenancy.
Land therefore should not be included on the balance sheet of the partnership unless it was the intention of the owner to transfer it to the partnership. It will only be considered transferred when the Land Registry deeds are changed.
Where issues frequently occur with these arrangements is typically on the death of a family member and unfortunately a long and costly dispute might be embarked upon by other family members who have been made promises by one of the individuals.
Having a written agreement and an up to date Will which sets out all of these points of ownership and the future running of the farm business will help to avoid a dispute and it provides a template for what happens when the partnership ends. Other advantages of a written agreement mean the partnership may qualify for tax relief and it may be able to apply for bank lending.
It’s important not to leave anything to chance in life, so ensure your farm business and family’s future is protected.