Address To Progress
Whether you sell your eggs at the farm gate or have diversified your farming assets which now produce a substantial turnover, you must mould the legal business structure that you work under to suit your practical operations.
Everyone knows that no farming business is the same, similar maybe but never the same. Your chosen legal structure therefore depends on your current situation, aims and objectives and in turn determines a number of issues such as tax, future succession of the business, liability and more.
Let’s picture this:
You’ve just had a tender accepted on the 100 acre farm down the road, you have no personal ties, no spouse or children to think of and you have enough working capital behind you after many hard years of scrimping and saving. It is likely that a solicitor may advise you to set up as a sole trader which comes with 100% control, retention of all profits to you and you alone and decisions made extremely quickly. Unfortunately it may be slightly more difficult to finance that brand new combine you’ve always wanted as you are unable show enough serviceability on your own and additionally as sole traders are not seen as a separate entities by law they are subject to unlimited liability, i.e. you risk your home, personal savings and other assets whether they are business related or not. If you are extremely profitable at this stage, you may consider a limited company to take advantage of the lower tax rate, but let’s be realistic, it’s 100 acres!
Within 10 years, you have married and had two children. You have enough funds to buy a 300 acre arable farm with a farmhouse a few cottages adjacent to the A1 therefore the perfect location for a farm shop. You and your other half are both a partnership and although you may not have formalised it, you share the profits, the liabilities and the decision making which all form the basis of a formal agreement. You have inputted the same amount of capital and everything up to now has been split fairly between the two persons involved. This works well whilst you both get on, however situations change, cracks may start to appear, or your son (who is now of suitable age) may like to be a part of the business. It is now long overdue that you should formalise your agreement and ensure that the following is considered:
Who has made what contribution to the business and how will future contributions be recorded?
How are the profits to be shared?
Who is to own the assets and if it is the partnership, how will the land be valued if a partner is to retire or die?
How may the partnership be terminated?
What will indeed happen should a split occur?
How will decisions be made, will partners have different weighting to each vote?
Depending on your own personal circumstances, there are many additional points that must be considered, this list is not exhaustive.
Another 10 years down the line and your farm shop has taken off, your son’s wife is now also on board and driving the business forward (she has been formally documented into the partnership and her proportionate share if she were to leave the partnership has been agreed from the outset). One of your concerns, and rightly so, is the fact that you are still liable for the whole business, as are your partners, and if the farm shop fails, it is all of your assets that could be up on the line to pay off debts incurred. You also need an injection of cash from an investor who is going to certainly want to sit on the fence rather than obtain a proportion of your liability. It is now time to seek advice regarding changing your legal business structure. If you decide you want to explore the advantages of becoming a limited company then ensure you consider the following whilst also seeking further advice:
Various tax implications: profits are taxed at a lower rate in comparison to Income Tax (main rate of Corporation Tax 21% with effect from 2014, in comparison to Income Tax up to 45%), and companies provide the flexibility to structure efficient reward packages to shareholders and directors.
Costs of setting up can be reasonably high, and the fact that you would have to disclose information publically through Companies House is certainly something to consider.
Accounts become more complex and there becomes the need for audited accounts subject to limitations.
Although not exhaustive, the above scenario demonstrates that as a business changes, so does the need to change your legal structure, whether that be amending the partnership when substantial changes occur, or for choosing an entirely different legal structure to ensure the most tax efficient, limited liability and practical solution going forward.
Don’t wake up one day and realise your farm has been sold from under you because you didn’t consider all of the options.