When two or more people come together to farm with the intention of making a profit, then they create a farming partnership. In order for this to work fairly and to help prevent any disputes, then a farming partnership agreement can be drafted, outlining all of the terms of the partnership. This can include details about how resources will be shared, efficiency and tax relief amongst many other things such as the ownership of assets.
By putting this kind of agreement in place, farmers will find that their interests are better protected, and everyone can work together knowing exactly where they stand. The agreement ensures fair treatment for all parties and creates a transparent working environment that can grow and evolve in a healthy and positive way.
At Lovedays Solicitors, our team of experienced agriculture lawyers can help to get your farming partnership off the ground by helping to put together a correct, thorough and legal agreement that everyone in the partnership can benefit from.
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The Necessity of a Written Farming Partnership Agreement
Whether you commit it to writing or not, a partnership is automatically created when two or more people decide to work together for the same purpose. A written agreement is not therefore required, and an oral partnership is then created instead. This dates back to 1890, when farming was a simpler way to make a living and people entered into agreements with far less to their names. Whilst an oral agreement may have been sufficient back then, it does not cover all of the complexities that a modern farmer now faces.
A formal farming partnership agreement is a legally binding document that establishes all of the important points within a partnership. Each individual will enter the partnership with different assets such as land or equipment, and these will be set out in order to establish ownership, and the roles and responsibilities of each person can also be laid out. This gives each person the opportunity to think about how the partnership will work and can avoid misunderstandings or disputes further down the line.
A written farming partnership will not refer to the day-to-day running of the farm, and instead it concerns itself with the more valuable factors of asset ownership and the line of succession for the business if it is part of a family. It can also detail how profits will be shared, what belongs to the partnership, and what will happen in the event of the death of a partner.
This agreement is not just necessary for the partners themselves, but also for outside parties. For example, banks will want to see a written agreement for any security instructions, and lenders will want to know what is in place before they will agree to a loan or mortgage.
Key Components of a Farming Partnership Agreement
A farming partnership agreement should include as much detail as possible that covers the formation of the partnership, what happens during the duration of it and what will happen when it comes to an end. This means that all parties will always be clear on where they stand, and it can be much easier for a solicitor, arbitrator or court to come to an informed and correct decision if a dispute does arise.
It is important to outline what assets each partner brings into the business, including property, land and equipment. This should be listed along with an approximate market value as well as any other tangible contributions.
The partnership agreement should also look at how the money in the business will be dealt with. There should be clear plans in place for the management of capital profits and losses, as well as any income profit sharing modalities. This ensures that all partners know what they are responsible for and what they are entitled to receive from the partnership.
Where finances are concerned, it is also important to outline who is responsible for different financial aspects. It should detail who will have access to bank accounts, and make loan applications amongst other things, and how these will be managed.
At some point, the partnership will come to an end, whether this is through choice or through the death of one party. It is therefore important that there are clear rules on how this should be conducted. It will need to state how a partner will serve notice of their intention to leave the partnership and what will happen to it when this occurs.
All parties will need to agree on what will happen to the assets of the departing member, as well as their shares and profits. Usually, if a partner dies, then the partnership will be dissolved, and so provisions should be made within the agreement to override this and prevent any catastrophic consequences for the business. It can also define what will happen to their share and who it will be passed to.
Sometimes, disputes can arise, and the agreement can be a good point of reference when it comes to dealing with them. It can also set out agreed dispute resolution methods to help get to the bottom of issues with as little distress as possible.
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Financial and Legal Benefits of a Formal Agreement
A formal agreement should be put in place for a number of reasons, but one of the most important ones is for the financial and legal benefits that it can provide.
Once written confirmation of the assets belonging to the partnership are recorded, it may be possible for the partnership to qualify for 100% Business Property Relief (BPR), or 50% is calculating the deceased’s assets for inheritance tax purposes.
BPR is important as it allows business owners to pass on assets at a reduced rate of Inheritance Tax whilst they are still alive or as a bequest in their Will if they have owned the assets for at least two years before death.
BPR requires a farm to be a predominantly trading business, and so your farming partnership agreement can help to prove this. Shares in a mainly trading business are eligible for 100% BPR, land or buildings owned outside of the business but used for business purposes may only be eligible for 50% relief. An agreement can create a much clearer picture of what is owned by the business, and therefore what is eligible.
Agricultural Property Relief (APR) is also an important factor to consider in relation to your Farming Partnership Agreement and your Inheritance Tax plans. APR gives farming families the opportunity to pass agricultural property on during their lifetime or in their Will at a reduced or 0% rate of Inheritance Tax. In order to be eligible for this, the land or relevant property must have been owned for at least seven years or occupied for at least two years.
Agricultural Property Relief can be due at 50% or 100% but does not apply to farm equipment, machinery, derelict buildings, harvested crops or livestock. It does, however, cover growing crops, rearing animals or take the form of farm buildings, cottages and houses.
By considering all of this as part of your farming partnership agreement, you can help to benefit the business and avoid a lot of turmoil in the event of the death of a partner.
Managing Changes and Succession in Farming Partnerships
Eventually, the time will come for a partner to move on, either through retirement, incapacity or death, and these can lead to big changes in the partnership. These will need to be managed carefully, so it is important to set out instructions in advance through the farming partnership agreement.
If an agreement has not been put in place, then the law states that all partners have equal profit shares, equal interests in all assets and that all property bought with partnership money belongs to the partnership. An agreement can outline what all of this should be, so that a departing partner or their families, will receive what they are rightfully entitled to.
In most cases, the value of the shares and assets of a partner will be valued at current market rates. It is important to remember that a partnership agreement will override anything that has been written in a Will and so partners cannot leave aspects of the business to their families that they are not rightfully entitled to.
When considering what will happen in the event of a death within a partnership, it is also wise to look at succession planning.
As many farms are run as family businesses, it may be the intention to pass it down through the family, and so these wishes should be written into the agreement. This can help to prevent the dissolution of the partnership in the event of a death, and can also stop personal representatives insisting on the sale of partnership assets.
The succession plan can include details on how and when family members will be integrated into the business, what their entitlements will be and what they can expect from the partnership. This can help to ensure everyone understands their position during a typically difficult and emotional time, making it much easier for all concerned.
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Lovedays Solicitors: Your Partner in Drafting Partnership Agreements
Whilst many farmers have relied on oral agreements over the years, it is now clear that these can lead to some difficult situations. Putting a farming partnership agreement into writing not only helps the partners get off on the right foot, but it also allows them to plan and work together more effectively.
It is important to seek professional legal advice during this process in order to ensure that the agreement is fair and valid. This can not only be beneficial in navigating relationships within the business, but also in conducting formal affairs such as applying for loans and relief schemes. It also allows for proper succession planning and can have a number of tax benefits as well, if written properly.
At Lovedays Solicitors, we have long standing experience within the agricultural sector, and are therefore in the best position to draft your farming partnership agreement for you. We can not only give you the best possible legal advice, but we can also collaborate with accountants and land agents to make sure that the agreement is comprehensive and understood by everyone involved.
Drawing up a farming partnership agreement is likely to be one of the most important aspects of setting up and running your business so it is vital that it is done in the right way to prevent any pitfalls in the future.
Conclusion
Creating a Farming Partnership Agreement is the best way to protect your farming future. It ensures that all parties go into the partnership with full disclosure and transparency. It is also designed to make sure that all assets and interests are recognised and protected.
Disputes between partners usually occur because they have not received the proper advice when entering into the partnership, causing doubt or resentment to occur. By drawing up a Farming Partnership Agreement with Lovedays Solicitors, you can benefit from our extensive agricultural legal experience to ensure that all necessary details are covered. This helps to avoid disputes throughout the working partnership and can also ensure the smoothest possible transition when any party departs.
Our friendly and professional team will work with all of the partners involved and any other professional advisors to ensure your agreement reflects your partnership accurately and can provide something which is legally binding for you all.
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