Family members involved in farming operations may unwittingly create various partnerships over many years. These have significant legal consequences that may only become apparent in a moment of crisis, such as the death of a family member or a family fallout. To avoid protracted disputes and further breakdown of relationships, it is always advisable to ensure that partnership agreements and wills are consistent and correctly reflect the intentions of the parties.
Partnerships are created automatically
Unlike companies, partnerships do not have to be registered. If people carry on business together with a view to a making a profit, a partnership is automatically created even if they do not consciously agree to this. Each time a family member stops being part of a farming business – by choice, or because of death or a dispute – that particular partnership ceases to exist, and a new partnership is created between the remaining family members who continue to run the business. As a result, several different partnerships may be involved in running a farm over decades.
Understand what is, and isn’t, partnership property
Understanding that your farm business is a partnership is important as the partners personally share responsibility for the debts and obligations of the farm. Each partner also pays personal tax on his or her share of the partnership profits. Usually, whatever is brought into a partnership or acquired by the business is partnership property, although this does not necessarily apply to the farmland itself. An individual may continue to own the land but allow it to be occupied and used by the farm business. However, if the land is included on the balance sheet of the partnership, it could be deemed that the intention was to transfer ownership from the individual to the partnership. Assessing the correct position may be complicated if children who have joined the farming business have been promised that they will become the owners of the farm. They may assume that even if the land is not a partnership asset it is their inheritance. But, unless the landowner’s will properly reflects this understanding, they will not automatically become owners of the land.
Put your partnership agreement in writing
After years of working harmoniously together, a farming family may be thrown into crisis if promises or expectations are not met after a sudden falling out or on the death of a family member. If disagreements cannot be resolved, there may have no choice but to take the matter to court. A family farming together cannot avoid being a partnership but can avert legal action by ensuring that their business is set up as they intend. The experience of the Williams’ family to is testament to the distress caused by the partnership agreement being at odds with the partners’ wills.
A written partnership agreement will avoid disputes and govern what happens if the parties’ relationship breaks down. It will also enable a farm business to receive bank loans and allow it to be eligible for various types of tax relief. Keeping existing partnership agreements up to date is essential, as is ensuring that partners’ individual wills reflect the partnership agreement. Seeking professional assistance to prepare partnership agreements and wills - before problems arise or surprises come to light - is money well spent.
This article first appeared on the Warwickshire Rural Hub legal advice page.