Farming partnerships are common in agriculture, especially within family-run operations where shared responsibility and working together come naturally. These types of partnerships often begin informally, based on trust and tradition, without much consideration for whether this relationship should be documented by formal agreement.
However, business agreements that lack formality and clarity may lead to misunderstandings over time. Changes in family dynamics, financial pressures, or succession considerations can put pressure on the farming operation. Without a written agreement, those involved in the farming partnership risk disputes over responsibilities, profit distribution and even ownership of property and assets. These challenges are far easier to guard against ahead of time, via a formal partnership agreement, than to seek to resolve later down the line.
What is a farming partnership?
A partnership is a business arrangement where two or more persons carry on a business in common with a view of profit. Unlike companies, partnerships do not need to be registered; a partnership can be automatically and unintentionally created through informal arrangements and conduct (often the case in a farming-context). Without a formal agreement, the default provisions governing a partnership are found in the Partnership Act 1890 (the Act). The Act covers matters like: profit sharing, decision-making, and dissolution.
In practice, many farming partnerships operate without formal recognition of their partnership-status. Day-to-day operations may involve multiple family members contributing labour, purchasing assets and livestock, sharing income, or making joint decisions. However, without a written partnership agreement, the default legal framework applies, which may not reflect their intentions or contributions. Further, the default provisions are not tailored to protect long-term interests, particularly in relation to succession planning, inheritance tax considerations, or potential disputes. Formalising the partnership helps tailor the regulations to your circumstances, by clarifying roles, responsibilities, and ownership, and therefore providing greater certainty and legal protection for the future.
How are farming partnerships typically structured?
Farming partnerships can take a variety of forms, depending on the needs of the business and the contributions of each partner involved. Partnerships can be structured equally, or based on the contributions of each individual. Contributions can be in the form of capital, assets, land, labour or expertise. As such, sharing arrangements and the ownership of assets can be weighted accordingly.
The structural organisation of a partnership has a direct impact on control and decision-making within the partnership. Equal partnerships generally involve shared authority and collective decision-making, while contribution-based arrangements may give greater influence to those with a larger financial or operational stake.
Without a formal agreement, the default provisions dictate that all partnerships share equally in the profits and capital of the partnership, regardless of actual contributions. This can lead to serious complications and disputes later down the line, if one partner has provided more land, labour, or capital than others, or family members assume differing roles within the business.
To avoid misunderstandings and protect both the farm and family relationships, it is essential to have a tailored partnership agreement that clearly sets out ownership, profit-sharing, responsibilities, and plans for succession.
Why a written farming partnership agreement is essential
In many family farming businesses, it’s common for arrangements to develop over time, without any formal documentation. Roles may evolve and change, responsibilities may be assumed without discussion and contributions (including but not limited to financial) may go unrecorded. While an informal approach can work while relationships are strong, the business and individuals involved can be left vulnerable when circumstances change.
A common misconception is that family members will automatically inherit or retain rights over a partnership. In the absence of a formal partnership agreement, a partnership is immediately dissolved upon the death of any partner. Further, if your wills do not align with your intentions, surviving family members may find themselves with no legal entitlement to the partnership business or its assets.
A written partnership agreement is a vital tool for succession planning and ensuring business longevity. It creates a clear framework that covers:
- Ownership of land, livestock, machinery, and other key assets.
- Roles and responsibilities, ensuring that each partner’s duties and decision-making authority are understood and agreed upon.
- Profit sharing by documenting how profits and losses are to be divided among the partners.
- Procedures for resolving disputes and disagreements between the partners.
- What happens when a partner leaves or dies, setting out exit arrangements and succession planning.
- Tax treatment, enabling the partnership to evidence compliance and access certain tax reliefs. Which can also assist with inheritance tax planning in the future.
Farming partnerships and land ownership: what’s the connection?
When a partnership uses land for farming / business purposes, that land can either be owned by: (1) the partnership (i.e., all the partners collectively), or (2) personally, by one or more of the partners, and used by the partnership (e.g., leased to the partnership for a rent).
When a partner dies, retires or exits the partnership, confusion and complications can arise if ownership of land is not properly documented. Typically, land is a high-value asset and if ownership is unclear, disputes may arise over:
- Who has rights to use or control the land
- Who gets a share of the land’s value
- Who pays taxes or maintenance costs for the land
- Whether land can be used to pay off debts or liabilities (of either the partnership or a partner), or buy out an exiting partner
Professional legal and financial advice is strongly recommended to ensure land ownership arrangements are appropriately and correctly documented. This is key for ensuring asset protection, tax-efficient structuring and long-term continuity and stability of the farming business.
What happens if a farming partnership ends or a partner leaves?
In the absence of a formal partnership agreement, a partnership automatically dissolves / comes to an end, if any one of the partners: dies, is declared bankrupt, or (for any reason) gives notice to the other partners of their intention to dissolve the partnership.
Upon dissolution of the partnership, the partnership assets (including land, equipment and stock) may be sold to settle debts and liabilities, and distribute proceeds in satisfaction of each partner’s share, potentially jeopardising the continuity of the farm. Moreover, disputes over ownership of land and assets, entitlements and decision making authority are more likely in these circumstances.
Advance planning is essential to ensuring the financial stability and continuity of the farming business. This includes incorporating provisions into the partnership agreement to prevent automatic dissolution in the event of a partner’s exit and establishing mechanisms to allow time for funding any payments due to an outgoing partner.
What legal and tax considerations should farmers be aware of?
Farming partnerships can offer various legal and tax benefits when properly structured and managed.
Although a partnership is not taxable as a business entity in its own right, it must be registered with HMRC, to ensure compliance with tax and regulatory obligations. A nominated partner is responsible for filing the partnership tax return. In addition, each partner is personally taxable on their own share of the partnership profits and must submit their own tax return. A key benefit of formalising a farming partnership via a partnership agreement is the ability to split income between parties. This, with advice from an accountant, can support tax efficiency across the members of the partnership.
Partnerships can also be utilised as part of wider estate planning strategies, particularly where agricultural property relief and business property relief may apply, helping to preserve the farming business for future generations. However, these reliefs are dependent on correct legal and financial planning and structuring, and each partnership’s circumstances should be carefully reviewed with your financial and professional advisors.
Ensuring you are on top of the legal and tax considerations for your farming business is particularly important, given that the partners in a partnership business are jointly and severally liable for the debts and obligations of the business. As such, each partner could be held personally liable for the full amount of any liabilities.
Farming partnerships need strong legal foundations
Given the complexity of these issues and their potential long-term impact on the partners personally and the longevity of the partnership business, it is essential to seek advice from a solicitor and/or accountant with expertise in agricultural businesses to ensure the partnership is structured and managed effectively.
If you’d like expert advice on setting up or reviewing a farming partnership agreement, our team at Goughs is here to help. Contact us today to arrange a consultation.
