Partnership Agreements for agricultural businesses
Whilst limited companies do feature in a number of agricultural business structures, it is worth bearing in mind partnerships are still the most popular business structure for farmers. In order to operate as a partnership its important there is an underlying agreement in place that sets out how the business in conducted.
It is not a legal requirement to have a Partnership Agreement, but in the absence of such an agreement you will have to rely on the Partnership Act 1890 which could have lots of unpleasant and, possibly, life changing consequences.
Partnership agreements are prepared by solicitors and are relatively inexpensive. It should be kept up to date and fit for purpose. So what should be included?
- What is the business name and where does it do its business
- What does the business do, for example farming. Is it to be wide-ranging or for a single purpose
- Who are the partners
- Are the partners to be equal or do they have different interests, for example financial and time commitment. What are the profit sharing ratios. Should any of the partners have a prior charge on profits - often referred to as a salary
- If the ownership of capital assets, for example the farm itself, is in different proportions to the division of profits, the partnership agreement should clearly set this out. If this is the case, is it might be worthwhile setting-up “Heritable Property Capital Accounts” in the financial statements. Any gains or losses arising on those assets should attributed to the owners
- The requirement to produce annual accounts and the regular accounting date. The partners should approve and sign the accounts. If they do not, for whatever reason, there should be a default mechanism
- Decision making and voting rights need to be carefully considered in some circumstances
- Retirement through wanting to leave the partnership, death, ill health and expulsion. What rights and protections does the outgoing or retiring partner have and also those of the remaining partners. Examples might include, the ability to demand that all assets are revalued to market value and payment to an outgoing partner is to be over five years with interest at 1% over base rate
- Drawings policy
- Prohibited Acts, for example, you cannot buy or lease a farm (or a Ferrari!) without your other partners consent. Likewise, no guarantees are to be given
This list is not exhaustive but includes the main areas to consider. Do not forget, Partnership Agreements, generally, only come into their own when things go wrong, at which point they tend to be worth their weight in gold and save you a fortune in professional fees!
Please contact your usual Azets contact or a member of the Rural group if you wish to discuss this matter further.
