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The right business structure for your farm
There are three main business structures through which a farmer may run their farming business as follows:
1 Sole trader
This is one farmer, farming on their own. They are the sole owner of the business and thus entitled to all profits, but also liable for all losses. There are no legal documents required to evidence this business, however it is likely that they will have annual business accounts.
This is two or more people carrying on a business together with a view to making a profit. Such businesses are governed by the provisions of the Partnership Act 1890, unless statutory provisions are amended by a written Partnership Agreement. A partnership envisages each partner contributing their time, skills and possibly even capital to the success of the business and in turn receiving a share of the profits. Each partner will however, also be personally liable for all business debts and liabilities.
The partners can hold land and property as assets of the partnership. It is important to be clear what is and what is not a partnership asset, as this can impact on taxation and also the manner in which the partners may dispose of their interests in these assets.
It is also important for a partnership to have a written Partnership Agreement which sets out the terms agreed between the partners and crucially, can enable the partnership to continue even after the death of one partner (unlike the 1890 Partnership Act provisions which provides for an automatic dissolution of the partnership on the death of a partner).
Farming partnerships are common business structures within the rural sector due to their ease of set up and flexibility for business changes and accounting.
3 Limited Company
Farmers may own shares in a limited company through which all farming trade is undertaken. The company is owned by the shareholders and run by people appointed as directors. A limited company must be registered at Companies House and should submit annual accounts to Companies House. A farmer’s interest in the business is limited to the value of their shares in the company and will generally only be liable for debts up to the value of his shares.
It is important for a company to have written Memorandum and Articles of Association to set out agreed terms.
Every farming situation will be different and trade may be undertaken by one or more of these business structures, or other alternative structures. In any circumstances, it is vital to take professional legal advice to ensure the correct legal documentation is in place to support such structures and agreed terms - as well as obtaining appropriate accounting and taxation advice.
Contact specialist Rural lawyer Melissa Taylor for further information.