Partnership Agreements: An Essential Tool for Farmers
There are a large number of farming partnerships in existence in England and Wales.These usually arise organically as many farming businesses tend to be family run. This is because a partnership is generally defined as two or more people running a business with a view to making a profit, and such partnerships can often be implied by conduct.
However, having a written partnership agreement in place is always advisable.In the absence of such an agreement, the provisions of the Partnership Act 1890 (the “Act”) will regulate partners’ conduct in the context of a partnership.Crucially, the Act is limited in its scope and its provisions can create some potentially damaging outcomes.
In light of the relative complications which underlie many farming partnerships, partnership agreements are an essential tool in recording partners’ true intentions.
Summarised below are some of the key features relating to partnership agreements:
- Partnership property.“Partnership property” broadly comprises property originally brought into a partnership and acquired during the course of a partnership business.The use of a partnership agreement allows partners to specify what property belongs to a partnership (including, for example, land or crops) and what belongs to individual partners (including, for example, specialist machinery or vehicles).This is important for a number of reasons, particularly in relation to partnership insolvency, tax reasons, and succession planning.
- Profits and losses.The Act provides that all partners in a partnership are entitled to share equally in partnership profits and must contribute equally towards partnership losses.In practice, a number of variations to this default provision may be more appropriate, which would need to be recorded in a partnership agreement.Shares of profits may be unequal (for example, where certain partners dedicate more time to running the business than others).
- Management and decision-making.The Act provides that every partner must take part in the management of a partnership.It also provides that differences arising as to ordinary partnership matters must generally be decided by a majority of the partners. Again, this may not be practicable or fair, and so partnership agreements can provide for alternative arrangements.
- Entrepreneurs’ Relief.This tax relief can afford business owners (including partners in a partnership) a favourable 10% capital gains tax rate on the sale of all or a significant part of a qualifying trading business.Careful planning is required in order to secure this potentially lucrative relief, and specialist tax advice should be sought and incorporated into a partnership agreement.
- Time devotion of partners.The Act is silent on how much time partners are required to devote to partnership businesses. However, the Act does provide that unless the other partners consent, if a partner carries on a competing business, he must account and pay over to the partnership his profits from that business! A partnership agreement can specify whether partners are required to devote the whole or a proportion of their time and attention, and specify the extent to which partners’ outside interests are permitted.
- Retirement; death and bankruptcy; dissolution and winding up.Under the Act, if a partner wishes to retire from or leave a partnership, or if he dies or becomes bankrupt, such event will generally have the effect of dissolving the partnership.This will not usually be the intention of the other partners, and so the consequences of these events can be covered in a partnership agreement.
- Wills and partnership agreements. A farming partnership agreement should define what happens to the deceased partner’s partnership share in the event of his death. This could involve the surviving partners buying out that share. The will of the deceased partner would ordinarily provide for how the money due to his estate is to be allocated between beneficiaries.It is important that any partnership agreement and the wills of each of the partners complement each other, as the partnership agreement would take priority over a will in the event of any inconsistency between the two.
- Inheritance tax.Upon the death of a partner,his partnership share will generally form part of his estate for inheritance tax purposes.The value attributable to partnership shares is often sizeable and corresponding estate inheritance tax liabilities can be significant.However, with careful planning, such liability can be reduced by using tax reliefs.In the context of farming partnerships, two particular reliefs are worth considering: business property relief and agricultural property relief.
- Incoming partners.If a new partner is admitted to a partnership, the Act provides that, technically, a new partnership is formed.This scenario may be avoided by incorporating specific provisions into a partnership agreement catering for the admission of new partners and confirming that new partners agree to be bound by its terms.
- Expulsion.There is no power under the Act for a majority of partners to expel another partner.This is the case even where a particular partner is performing poorly or is neglecting to perform his partner duties.A partnership agreement can allow a partner majority to expel another partner from a partnership in defined circumstances. Common grounds for partner expulsion include breaches of a partnership agreement, ceasing to hold relevant professional qualifications, conduct having an adverse affect upon the partnership business and ill health.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.