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Getting your family farm business structure right

Insights

Developing a business structure which works for your family could drive the farm forward, experts believe.

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According to Defra’s farm business survey, more than half of farm businesses are sole traders, with the next most popular business vehicle being a partnership.

 

Julie Robinson, partner at Roythornes Solicitors said: “In other words, 90 per cent of farm businesses are unincorporated.

 

“For family farms, the partnership is likely to remain the mainstay as far as business structure is concerned, with corporate entities and trusts in the mix where this best suits the needs of the family.”

 

But Mrs Robinson said it was becoming more common for farm businesses to limit liability.

 

She said: “With increasing exposure to market volatility, or if farmers are expanding with external investment and diversifying into riskier activities such as contracting or processing, limited liability has its attractions.”

 

Ashley Clarkson, director of agriculture at Grant Thornton, explained farmers could limit liability for certain parts of their business while keeping other parts as a partnership and sole propietorship.

 

He said limiting liability on all or part of a farm business could reduce exposure to risk, especially for those farms with diverse operations.

 

He said: “It allows you to do those entrepreneurial moves without having the same risk. It is not just something for the privileged or large-scale farms - we quite often see limited companies being set up.”

 

Farm businesses

Farm businesses

Sole traders - 52%
Partnerships 39%
Farming companies - 8%
(Less than 1% had ‘other’ structure)

 

*Defra sample of 750 farms

 

New approach

Mr Clarkson added incorporating part of a business could provide a new approach to succession and a way to bring new members of the family into the business.

 

He said: “The older generation can keep the land and the next generation can create their own business to prove their worth or bring a new approach. It incentivises the younger generation if the business is a real success and it belongs to them.”

 

But Mrs Robinson and Mr Clarkson highlighted the flexibility operating as a partnership gave businesses and claimed it was important to develop a structure which worked best for your business.

 

Mrs Robinson said: “One of the main advantages of partnerships is flexibility. Partners can bring in new owners and older partners can retire.

 

“Profit shares can be adjusted and rules changed by agreement, all without the changes having to be formally registered or made public.”

 

She said these flexibilities made partnerships particularly suitable for farms.

Case study: Joe Towers

Joe Towers runs a dairy processing unit in Lune Valley which buys its milk from the family farm, Brades Farm. The processing business trades legally as Brades Farm Dairy.

 

“The business relationship between the farm and the dairy processor is exactly the same as the traditional relationship between a farm and milk buyer,” said Mr Towers. “The dairy pays a competitive price to the farm.

 

“We have operated this way for three years and the purpose was to prepare for the next generation coming into the business, some of whom may be interested in farming and some in marketing,” he said.

 

“The advantage is the two businesses both stand on their own two feet and are accountable independently. In principle the farm should be able to seek a better milk deal elsewhere, should it choose to, and vice-versa.”

 

He highlighted the business structure had allowed him to progress into the area he was interested in without affecting the career path of his siblings.

 

“For me, I felt there was too much opportunity in British dairying, for both producers and processors, to pass up the chance to develop a business in that value sector.”

 

Three main business models

Sole trader: The business and the person who owns it are, in effect, one and the same. The sole trader’s liability for the debts of the business is unlimited. This risk is balanced by the lack of legal formality and low administration costs. You are your own boss

 

Partnership: The structure involves more than one person. In a general partnership, the partners have unlimited and joint liability for the debts and obligations of the business incurred while they are partners. As with sole trader status, the formalities are few and the administrative burden low

 

Limited company: A separate legal entity from its owners. The owners’ liability for the company’s debts is limited, but owners cannot take money from company accounts. Although lower than in the past, there is a significant administrative burden which goes with limited liability. Information about ownership, financials and the company constitution is made public

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