Operating a farming partnership without a Partnership Agreement poses many problems, some of which farmers may not be aware of, and these can have a drastic effect on the business.
When two or more persons carry on a business in common with a view of profit, a partnership is formed under the Partnership Act 1890, without any formal registration requirements. However, in the absence of a written Agreement, the Act governs the business, and its provisions can have unforeseen consequences.
For example, the Act states that the partnership is automatically dissolved for all partners if one partner dies. There is no power under the Act to expel a partner, and partners have no automatic right to retire either.
Also, in the absence of any written agreement to the contrary, the partners must share equally in the capital, profits and losses of the business, regardless of what they may individually have contributed. This can create inadvertent ‘gifts’ of land and property to the other partners, leading to tax consequences for all.
Creating a Partnership Agreement avoids these pitfalls, and can include specific provisions agreed by the partners.
These Agreements can set out how the capital, profits and losses are to be divided between the partners, how to resolve any disputes, how new partners will be admitted, retirement provisions stating the basis on which an outgoing partner will be paid, restrictive covenants on outgoing partners to prevent competition from new businesses, and whether or not the farm is a partnership asset, or the property of one or more of the partners with an implied licence for the business to use it etc.
As Partnership Agreements affect all parts of the business, they should always be made in conjunction with the Accountants, Solicitors and any other relevant advisers. It is easy for partners to regard the cost of a Partnership Agreement as an unnecessary expense. However, it is money well spent when considering the cost of rectifying the problems which can arise without one.
Senior Associate Solicitor – Denney King
07923 228 598