Exploring Farm Partnerships: A Guide for the Young Farmer

In the UK the vast majority of farming businesses are family owned. The farmer may be a sole trader, in partnership, or a director of a private limited company. In some cases, particularly dairy farming enterprises, it may be a combination of both a partnership and a private limited company.

As a young farmer, you may begin work on the family farm as an employee, receiving a fixed wage for the work you do. However, as your income increases the farm owner may be advised by their accountant to take you into the partnership.

Entering into a farming partnership is a significant step for you as a young farmer. It is crucial to pay attention to several key aspects, including the structure of the partnership, tax implications, liability, and the necessity for a properly drafted partnership agreement.

In this blog, Agriculture and Rural Affairs specialist Mike Bracegirdle answers the most commonly asked questions raised by young farmers when seeking advice on joining a farming partnership.

What makes up a partnership?

A partnership in farming typically involves at least two individuals jointly running the farm business. This can include family members such as husband and wife, or father and daughter or son. In the absence of a clear contrary agreement, this joint enterprise usually constitutes a partnership.

This is where a properly drafted partnership agreement becomes vital. Without one, this will simply operate as a partnership at will.

Many unintentional partnerships have been created, as it is not a requirement in law to have a written agreement. This type of partnership is governed by an act dating back to 1890.

How do I set up a farm partnership?

When you are setting up a farm partnership, it is advisable to create a partnership agreement that outlines how the assets and land will be divided within your farming operation.

A partnership agreement sets out how the businesses profits and losses will be managed and what will happen in the event that the business is dissolved.

It should also include information about how changes can be made to the way the business operates.

Having these procedures established and formalised in a partnership agreement will help to ensure the smooth running of business operations and prevent disputes, and will help with succession planning.

What are the benefits of having a partnership agreement?

A farming partnership agreement offers several key benefits. It minimises the likelihood of disputes by establishing clear terms regarding ownership, assets, and profit sharing.

If a dispute arises between partners, the agreement outlines how it should be resolved ensuring all partners are treated fairly.

Lenders are increasingly requiring a partnership agreement for loan approval to provide security.

Most importantly, without a formal agreement, partners are likely to be subject to outdated legislation, such as the Partnership Act 1890, which will not be tailored to your situation and could have unintended legal consequences.

What are the different types of farming partnerships?

There are three main types of farming partnership:

General Partnership: All partners share equal rights and responsibilities, with profits and losses distributed according to the partnership agreement.

Limited Partnership: Consists of general partners who manage the farm and limited partners who contribute capital but have limited involvement in decision-making.

Limited Liability Partnership: Offers partners limited liability protection, shielding personal assets from business debts and obligations.

Do I have to have a share in the profits?

Not necessarily.  It is possible to become a fixed share or salaried partner, which means that, subject to sufficient profit being made, you will normally receive your fixed share before the other profits are divided.

However, having a percentage share is generally advisable to maintain self-employment status for tax purposes. You should take advice from your accountant on this.

Will I become responsible for any debts of the business?

Partners in a farming partnership are, subject to any clause to the contrary in the partnership agreement, jointly and severally liable for the debts and obligations of the business.

This means that each partner can bind the partnership into contracts with third parties, potentially exposing all partners to financial risks.

Each partner is entitled to participate in the management of the business, but most farming partnership agreements limit the input a new fixed share or salaried partner can have in the business.

How will becoming a partner affect my tax?

A partnership is not taxable in its own right. Each partner is personally taxable on their own share of the partnership profits.

Unless you are a fixed share or salaried partner, you will need access to the financial statements of the business to understand your tax liabilities accurately.

What assets belong to the partnerships?

In many farming partnerships, land and property are held outside the partnership, with machinery and livestock forming the partnership assets. As an incoming partner, you should verify the ownership of assets before joining.

Why do the partnership accounts show a capital and current account?

Partnership accounts typically include capital accounts reflecting the value of partnership assets and current accounts showing profits and losses. This distinction helps partners understand the financial position of the partnership.

Does the partnership have a tenancy?

If the land is owned outside of the partnership, it is advisable to create a lease or tenancy to protect the partnerships interests in the event of a partner’s death. This ensures clarity and continuity in land ownership.

How do I dissolve a farm partnership?

If you find yourself in a situation where you need to dissolve a farm partnership due to a dispute, it is important to review your farming partnership agreement beforehand.

If there is no specific mechanism for dissolution outlined in the agreement, it is recommended to attempt to find a mutually agreeable solution that works for all parties involved.

However, if this cannot be resolved, you may need to seek a court order to dissolve the partnership.

One of the most common approaches to dissolving a farm partnership is for the remaining partners to buy out the share owned by the departing party.

After the dissolution, the remaining assets would be divided according to the terms of the written agreement.

How can Butcher & Barlow help with farm partnerships?

Entering into a farming partnership is a significant, yet exciting decision for a young farmer.

The key is to gather as much information as possible about the partnership’s assets, liabilities, and legal structure so that you are fully aware of your potential liabilities and responsibilities.

Insisting on a written partnership agreement and seeking independent legal and accountancy advice are highly recommended.

At Butcher and Barlow, our Team of Agricultural and Commercial Lawyers are experienced in advising young farmers, providing tailored guidance to help you understand the complexities of farming partnerships.

You can contact the team on 01606 334309 or email agriculture@butcher-barlow.co.uk