Farming Partnerships – The Importance of Having a Written Agreement
A significant number of farming families run their businesses as partnerships. Due to the familial nature of these partnerships, it is common for them to operate without a written partnership agreement. This is often because the strong bond of trust within the family leads them to rely on informal arrangements and simply proceed with their activities, as is customary among family members.
Nevertheless, despite the emphasis on family ties and trust, it is crucial for farming families to recognise the importance of implementing a written partnership agreement. Doing so does not undermine their familial relationship and trust; rather, it serves as an essential step that farming families should prioritise.
In the absence of a written agreement, the partnership is subject to the regulations outlined in the Partnership Act 1890. This framework dictates various aspects, including the dissolution of the partnership upon the death of a partner and the authority of one partner to terminate the partnership with notice. However, by having a written agreement in place, certain default provisions can be overwritten and modified as per the specific preferences and needs of the farming family.
A written agreement should address the following key points, which can prove useful for effective tax planning and inheritance tax planning:
• Clearly defining ownership of assets, distinguishing between those owned by the partnership and those personal assets “leased” to the partnership. This distinction will also aid in determining which expenses are categorised as partnership expenses and which are personal expenses.
• Identifying whether the partnership possesses any entitlements under the Basic Payment Scheme, as this can impact the availability of tax reliefs.
• Establishing a plan for transferring the farm to the next generation, including considerations of ownership, timing, and procedures. This is particularly crucial in determining capital contributions, as it directly affects the amount received by a partner upon exit.
A written agreement is also useful for addressing the following difficult circumstances in an asset-rich, but cash-poor business:
• Determining protocols and the course of action if a partner passes away, becomes incapacitated, or retires.
• Establishing a method for valuing the interest of a former partner.
• Establishing procedures for the payout of a former partner.
• Specifying protocols to handle disputes or divorces.
Incapacity is a situation that often goes overlooked, yet it is crucial to address. It can encompass various scenarios, including instances where an individual is affected by conditions like dementia or Alzheimer’s. However, it also entails situations where a person experiences a mental breakdown, rendering them unable to make decisions, or if they fall into a coma. Recognising and preparing for these circumstances is essential in any comprehensive plan.
Planning for divorce is not something a couple anticipates, but it becomes a necessary consideration, particularly when a family business is involved. This is especially true if a partner’s stake in the family business is considered in a financial settlement or if both spouses are partners. Although it may be an uncomfortable subject, addressing potential divorce scenarios can help protect the interests of all parties involved.
Ensuring alignment between a written partnership agreement, partnership accounts, and the partners’ intentions is crucial. It is not only essential for these documents to agree with each other, but they should also reflect the true intentions of the partners. The Partnership Agreement can be modified based on the partners’ consistent actions, and signed partnership accounts can serve as evidence of such actions. Hence, it is imperative for accountants and lawyers to collaborate effectively to ensure that the written agreement satisfies the partnership’s requirements, while adequately addressing any tax-related concerns.
The partnership agreement should additionally address the topic of partnership capital, as this becomes particularly significant in the event of disputes or for tax purposes. Similar to share capital, partnership capital cannot be withdrawn without the unanimous consent of all partners. It differs from loans or undrawn profits. Partnership capital may be classified into various types, such as general capital or land capital. Consideration should be given to the process of revaluation and how capital profits and income profits should be distributed among the partners. This is crucial because the majority of the value in farming partnerships typically lies in land, equipment, and livestock assets, which are often undervalued on the balance sheet.
Read more about Partnerships here: Learn About Family Farm Partnerships | Thursfields Law Firm
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