It is rare for partners in a farming partnership to own the business equally. In a professional partnership of unrelated individuals profits are withdrawn each year and capital accounts remain constant. In a family business profits are more likely to be left in the business and over time capital balances can build up. In other cases, partners take out drawings in excess of their profit share and the accounts show a negative capital balance. In this case, when a partner leaves the business they have to repay money to the partnership.
It is crucial that all partners understand what the annual accounts show in terms of ownership of the business.
What assets belong to the partnership?
Not all assets used by a business are necessarily owned by the partnership. In particular, farm property is usually owned by an individual partner outside of the partnership. Confusion can arise when a person joins a partnership and land purchased by the original partners is shown on the Balance Sheet.
A properly drafted partnership agreement will confirm whether land is a partnership asset, and if so, whether a retiring partner can claim a share of any increase in value.
How is the amount due to a retiring partner calculated?
The annual accounts of a business are prepared mainly for tax purposes and not all the assets on the balance sheet are included at market value. In particular, livestock and machinery are probably worth more than the value shown in the accounts.
Whether an outgoing partner is paid out using accounts value or market value will again be covered by a partnership agreement.
When does an outgoing partner get their money?
A partner resigning and asking for their capital to be repaid to them can cause serious cashflow problems to a business.
The partnership agreement will state whether a partner gets their capital back in a lump sum or spread over several years, and whether interest is charged.
Don’t make rash promises!
There have been a number of cases in recent years on the subject of Proprietary Estoppel involving farming partnerships. This is a legal claim made by a person dissatisfied with what they have received in a person’s Will. The key factors are:
One party has made a promise to another – for example father saying to a child “one day all this will be yours”.
The promised was relied upon – for example the child worked on the farm and received a lower income than they could have earned elsewhere.
The individual acted to their detriment – the promise was not implemented and the farm was gifted or inherited by another person.
The key issue here is to be open about your future intentions and succession planning, but not to make promises that you may not keep.
If you are planning for your future and would like more information or advice, please call me on 01228 690000 or email me at jonathan.york@armstrongwatson.co.uk
