Entering business is usually a carefully planned undertaking, however, this may not always be true of a partnership. Where family members, often across different generations and over many decades, are involved in a farming operation, they may unwittingly create various partnerships. All partnerships – even those that are unconsciously entered into – have significant, immediate and longer-term legal consequences which often only to come to light 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 farm family’s intentions.
An unintentional partnership?
It is not possible to create and operate a business through a limited company without consciously meaning to do so. The same is not necessarily true of a partnership. If individuals carry on business operations together with a view to a making a profit, the law considers that they enter a partnership, even where they do not consciously agree to this. There is no requirement for registration or a written agreement between the parties for a partnership to legally exist. This type of partnership is called a general or traditional partnership, and it is governed by the Partnership Act 1890.
A family working together to ensure that their farm is commercially successful may, as a matter of fact, be a partnership, whatever their intention and no matter how their business finances are structured. At a time of change or crisis, the exact nature of their relationship may be called into question and may lead to a dispute. If called on to determine whether a partnership exists and the nature of such a partnership, a court will look at the substance of the arrangements and the working relationships between the parties, as well as any undertakings that have been made.
Who makes up the partnership?
In the absence of clear agreements to the contrary, if at least two people, including two members of a family, work together on a farm they are likely to constitute a partnership. This includes a husband and wife who run their farm business as part of their life together. Each time one of the family members stops being part of the farming business – by choice, or because of death or a dispute – that particular partnership ceases to exist. If the business of the farm continues, a new partnership is immediately created between the people who continue to run the business. Over the course of decades of a farm’s operation, it is possible that several different partnerships may be involved in running the business.
What are the consequences of being a partnership?
Partners are jointly and severally liable for the debts and obligations of the farm. Each partner can bind the partnership into contracts with third parties. Each partner is also entitled to participate in management of the farm business, and to receive a share of profits of the business. These aspects may be expressly changed by agreement between the partners. As discussed above, a partnership ends on the resignation or death of a partner.
Unlike companies or sole traders, who pay on their own business taxes, a general partnership is not taxable in its own right. Rather, each partner is personally taxable on their share of the partnership’s profits. The partnership therefore needs to have its own financial statements so that it is clear how the profits (or losses) of the partners are calculated.
What assets are included in the partnership?
Unless there is a written agreement that defines the assets and liabilities of a partnership, the law[1] regards whatever is brought into the partnership or acquired by the business as partnership property. Precisely defining these assets and liabilities may be complicated; it is often a question of fact, from which the intention of the partners will be understood. The farm accounts will usually be the best evidence of what makes up the partnership business, but these may be incomplete or inconsistent, so other aspects of the relationship of those involved may need to be considered.
What about the farmland itself?
Although farmland is vital to a farming business, this does not necessarily mean that the land farmed by the partnership is a partnership asset. If it is not specified in a written agreement, the intention of the partners needs to be determined from a variety of other sources, including the understanding of the individual partners, records and/or other documents. Simple assumptions should not be made.
It is legally possible for the farmland to be owned by one or more of the partners personally or jointly but to be occupied and used by the partnership under a licence or tenancy (if rent is paid to the owner(s)). But, if the land is included on the balance sheet of the partnership, it may be deemed that the intention of the owner was to transfer it to the partnership. Until the Land Registry deed is changed, the owner may be considered to hold the farmland on trust for the partnership.
Assessing the correct circumstances may be more complicated if children who have joined the farming business have been promised that they will become the owners of the land. They may assume that if the land is not a partnership asset, it forms part of their inheritance. But, unless the landowner’s will properly reflects this understanding, their children will not automatically become owners of the land as beneficiaries of the deceased estate; it may continue to vest in the partnership.
What can go wrong?
A farming family business may operate harmoniously as a partnership for many years, with family members working hard together, living on the land, and only taking what they need from the profits. But the partnership 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 who is a partner. A long and costly dispute may ensue. If disagreements cannot be resolved, there may be no choice but to take the matter to court. Often the children, who have relied on promises made to them to their detriment, ask to be given their share of the farm business or property immediately. A court will may compel this if it would be unfair not to do so. The views, recollections, and actions of all those involved - potentially spanning decades – need to be assessed, as well as the financial consequences. Should the farm be sold to give a child their share if it means that an elderly parent will have to vacate their home? Should a child, after a lifetime of involvement in the farm business, be left without a way of earning a living because the farm has been left to others? These difficult conundrums seldom have a universally happy result.
The costs of an unintentional partnership
Even without a falling out, members of farming families often rely on each other to leave the assets of the farm to the remaining partners and/or their children as a gift. However, if the owner of the assets has not reflected this in their will, the law will take its course and the remaining partners may need to buy back or pay tax on the assets that they need to continue the farm business.
The benefits of planning a partnership
Although a written partnership agreement is not mandatory for family members operating a farm and may not be needed for the day-to-day running of the business, it could assist in avoiding disputes and govern what happens if the parties’ relationship breaks down. A written agreement should deal with ownership of the assets of the farm business, including the land, and succession within the family business on retirement, resignation, or death. A written partnership agreement may also enable a farm business to receive bank loans and allow it to be eligible for various types of tax relief.
Avoid the pitfalls of unintentional partnerships
Agriculture is said to have more multi-generational family businesses than any other sector in the UK[2], and most of these businesses operate as partnerships. If you are members of a family farming together to make a profit, you cannot avoid being a partnership, but you can make sure that the structure of the farm business gives you all the best advantage of avoiding a dispute. A written partnership agreement will clarify how you all relate in the business, and what happens if one of the partners leaves. Likewise, 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 likely to be money well spent.
[1] Section 20 of the Partnership Act 1890
[2] IFB Research Foundation: “The State of the Nation: the UK Family Business Sector 2019-20”
