In part two of our feature series looking at core business issues for new and existing farmers, Ben Pike takes a look at the issue of farming partnerships. Common questions, pitfalls, worries and the importance of trust.
In part one of of our feature on farming partnerships we looked at the top tips to focus on when considering a farm partnership. Below are the most commonly asked questions - what pitfalls are you likely to come across? Who can I go in to partnership with?
Be in the know when it comes to farming partnerships...
New entrants looking to establish themselves in farming have an array of options when it comes to structuring their businesses.
Each route has its benefits and drawbacks but a key consideration for many about to start farming professionally is how to restrict the administrative burden of farm paperwork.
Rob Selley, an associate at A.C. Mole and Sons, says: “Partnerships are the most common arrangements you will find in the farming community.
“They are generally easier to set up, operate and manage than a limited company and they pose a much less onerous administrative burden.”
Unlike a limited company, a partnership does not need to publish annual accounts at Companies House. Different tax rules also apply.
“Partners are taxed on their individual share of the profits like any other self-employed person would be, while a limited company is subject to corporation tax – currently a rate of 20% of the company’s annual profit,” he adds.
Some paperwork is required, however. A partnership tax return must be submitted each year alongside a self assessment tax return.
“Profit extraction is much more flexible for a partnership. Funds permitting, you can withdraw any sum you want from a partnership as opposed to a company where much stricter rules apply.”
Rob says despite the partnership process being simpler to establish, it is essential an appropriate structure is well researched, written down and agreed to by all partners prior to work commencing.
“Some businesses opt for a limited liability partnership as it gives them the same flexibility as a traditional partnership but it limits the liability of members. It means one partner cannot be held responsible for the misconduct or mistakes of another.”
A farming partnership is a collective of individuals who get together and want to run a business together. It can involve any number of people – not just two.
Most people will look at forming a limited company or a partnership. The main difference is the liability. If a limited company has any liabilities, such as debts, the responsibility is on the company to settle them. In a partnership, the partners are jointly liable for the business, although there are ways to limit it.
Each party brings an asset or a number of assets to add to the partnership – someone may bring the land, another the machinery and someone else may provide the labour. A value is placed against every asset and a share of the capital is apportioned to each member. Details of how profits are shared out will also be detailed.
Details of what would happen in the event of a dispute should be written down and agreed from the outset. It should include how someone will be bought out if they leave and what notice period they have to give.
Wil Armitage has farmed in partnership with Peter Dixon-Smith in Leicestershire for more than 10 years.
He says the flexibility of the business structure the pair chose has allowed them to react to the challenges posed by the dairy industry.
Having worked together since 1990, Peter offered Wil a farm business tenancy on 405 hectares (1,000-acre) Keythorpe Lakes Farm, Tugby, in 2004.
“I did not have the capital or the confidence in the dairy industry at the time to take it all on,” says Wil.
Instead, the pair struck on the idea of a partnership agreement.
“I quickly realised if we carried on farming the way were doing it, we would end up making a living but not having a great business, so we converted to organic.
“Peter said he didn’t agree with the idea but he trusted me to do what I thought was best. I had confidence in the business plan and we went for it. We made money and he gained confidence.”
Turning Keythorpe organic was not written into the partnership agreement, but demonstrated to Wil how the structure can work when trust exists.
He says the most important line in the agreement is ‘we can change anything at any time providing we both agree to do it’.
The commitment from both sides allows the business to adapt and evolve – a vital tool when dealing with volatile commodity prices.
Building on the success of the partnership, the pair bought the 100ha (247-acre) Glebe Farm in Rutland in 2011 and they are building up the unit’s milking herd to about 250.
Alongside trust, Wil says communication is important.
“In any partnership there is give and take – things will hack you off. Communication can help to override those things.
“I would urge people not to make agreements which are too prescriptive – it should be about the agreement fitting the farm, not the farm fitting the agreement.”
Last year, Wil and Peter won the Farming Partnership of the Year at the British Farming Awards, co-organised by Farmers Guardian.
As part of the Business of Farming series, Farmers Guardian has teamed up with FarmCare to launch the Business of Farming conference, which takes place on December 6 at Wootton Park, Warwickshire.
The free one-day event has been researched with farmers across the UK and will look at the core issues affecting businesses.
Farmers can expect access to a range of motivational speakers offering take-home solutions which will serve to benefit, and protect, farming in the future.
For details and to register your interest, visit www.fginsight.com/businessoffarming