At the heart of many farming businesses in Scotland lies a deep-rooted family history and a strong connection to the land, built across generations of experience. Alongside this, and especially in our fast-changing and increasingly challenging world, farmers are seizing opportunities to adapt and innovate. Younger farmers in particular are bringing fresh ideas and perspectives, such as through new technologies, diversification, or changes in environmental approach.
When supporting younger farmers’ new ideas and projects, farming businesses may also be concerned to protect the farm and minimise exposure to risk. Happily, there are a range of legal structures available for farming families that enables this. Here we consider some of the structures available to support innovation whilst protecting the farming business.
Partnership Agreements for gradual handover of the business
Many in the rural sector will be familiar with the traditional farming partnership. It has been used for generations, and it provides a great deal of flexibility for farmers. Partnerships can be a great way to bring the next generation into the farming business as part of a gradual handover. To ensure success, a detailed partnership agreement is recommended to ensure that roles and responsibilities are clear and to avoid misunderstandings.
Using a partnership agreement to bring in the next generation can give them a stake in the business and support them in learning the ropes, while the more experienced generation retains a degree of control. Partnership agreements can provide lots of flexibility around control or transfer of assets, as well as flexibility in allocating profits and income. The agreement can be adjusted to best suit the needs of the individual family business, and it can be easily updated over time as the younger farmers gain experience.
The main disadvantage of a traditional partnership is exposure to risk, as all partners are personally liable for the losses of the partnership. Sometimes something more is needed to mitigate this risk, especially when embarking on projects that may carry higher risks than traditional farming.
Limited Liability Partnership (“LLP”) for managing risk
As the name suggests, LLPs are similar to traditional partnerships, but with the advantage that the individual partner’s liability for partnership losses is limited. Like a traditional partnership, an LLP can be used for the gradual handover of a business. The downside of an LLP is that the administrative burden is higher, and more information must be made public. For example, an LLP needs to be registered at Companies House and is required to file annual accounts.
LLPs can work well where a farming business is taking on significant capital investment, for example upgrading machinery or investing in technology to improve efficiencies. In a family partnership with multiple generations, there are likely to be different comfort levels on individual exposure to risk, which could become a bone of contention. This issue can be avoided by using an LLP to protect personal assets.
Setting up a company is another option for farming businesses, with the same benefit of limiting individual exposure to risk. However, the tax arrangements for limited companies are significantly different to partnerships and can result in disadvantage without careful planning. Companies also tend to be less flexible than partnerships in terms of owning land and transferring it between family members, which can be an important consideration for farming families.
Splitting out assets for higher risk projects
When it comes to an exciting new project, perhaps repurposing old steadings as a wedding venue or farm shop, or a renewables development, it may be worthwhile to separate the project from the core farming business. This could be done by creating a separate partnership, LLP or company, depending on the circumstances and the tax implications.
The risks associated with such projects can be greater than traditional farming. By separating the project from the core farm, if things do go wrong, the rest of the farm is not vulnerable to bear the losses. This can give farmers the confidence to embark on new ventures, with the comfort that they are not risking their family business and often their home in doing so.
There can be tax implications and benefits in separating a farming business in this way, particularly where a diversification project is not core farming. Appropriate advice should be sought at the outset of the project to ensure that the structure best supports the project.
Supporting innovation while protecting the business
Ultimately, the right legal structure can help a farming family strike a sensible balance between encouraging innovation and safeguarding the business. Whether through a well-drafted partnership agreement, an LLP to limit personal exposure, or a separate vehicle for diversification, careful planning can provide a strong platform for new ideas while protecting the farming business and its ambitions for generations to come.
*Originally published in Scottish Farming Leader – June Edition.
