A FARM partnership can be a great way of bringing your children into the family business and of enabling those new to farming to work collaboratively to develop and hone their skills.

However, as Hilary Barlow, pictured, commercial lawyer at Pearsons & Ward Solicitors in Malton, explains, for this type of arrangement to work you need a comprehensive partnership agreement and an awareness of the common pitfalls.

Farmers commonly opt for the creation of a partnership because of the ease with which such an arrangement can be established but problems can arise when you go into business on the strength of a handshake or when younger members of a family wish to have some independence or older members of the family which to take a step back.

Without an understanding of your rights and responsibilities there is huge potential for things to go wrong.

Here are just a few of the problems Hilary encounters.

No partnership agreement

Because partnerships can be created without any formality it is not unusual for the need for a written partnership agreement to be overlooked. This can be problematic because in the absence of an agreement the provisions of the Partnership Act 1890 (“The Act”) will apply which can have unintended and unwelcome consequences. One of the most serious of these consequences is that under the Act the presumption will be that the partnership will dissolve in the event of the death of one of the partners, which can cause bank accounts to be frozen and the inability of the partnership to operate.

Further, under the terms of the Act, all partners are entitled to an equal share of the profits irrespective of the level of their investment or contribution to the farm’s success. There is also a presumption of equal liability for the payment of debts and the absorption of business losses, and no requirement to seek the approval of other partners before entering new contracts, extending borrowing or making withdrawals from the farm account.

If you want to avoid the default provisions applying you need to put a partnership agreement in place.

Lack of regular reviews

Even where a partnership agreement exists, problems can be encountered when it not reviewed and updated regularly.

As a general rule of thumb, partnership arrangements should be reviewed every two to three years and whenever a significant event occurs, such as the diversification of the business, a fresh injection of cash or other capital contribution, a change in profit share arrangements, the introduction of new tax rules or whenever a new partner joins or an old partner leaves. A review is also recommended in the run up to a partner’s marriage or divorce and immediately following a partner’s death.

Confusion over asset ownership

Some assets in your business may belong to the farm partnership and some may belong to you personally. Whatever the situation, ownership rights need to be clearly defined and not just in respect of things like land, buildings and machinery but also for crops, livestock, quotas, subsidies and less obvious things like water abstraction and fishing rights.

How the farm assets are held may have a significant effect on when and how a partner will retire or leave the farming business and on each partner’s succession and tax planning.

As the business develops and your circumstances change, ownership arrangements may need to be revisited.

As with most matters concerning the farming business, it is important to ensure that all the professionals that assist with the business, such as your solicitor, agent and accountant, are included and collaborate in any changes to the structure of the farming business to ensure there are no unforeseen consequences.

If you would like help creating a partnership agreement, or reviewing an existing partnership arrangement, phone Hilary on 01904 716074 or email hilary.barlow@pearslaw.co.uk to see how we can assist.