Legal aspects to consider

Once you have identified a person or persons you think you could 'share with' and prepared a business plan you should obtain specialist advice on the legal, tax and accounting issues relating to your sharing arrangement. Every case will be different. The advice will depend on the individual circumstances of the parties to your proposed arrangement and your plans for the future on a personal and business level. Issues to be considered at this stage will include:

  • What are the tax implications for each party and any joint venture vehicle on setting up, maintaining, expanding and if necessary unwinding the new arrangement?
  • What parts of each party's respective existing businesses are joining together - are the entire businesses and herds being merged or, at the other end of the scale, are the parties simply wishing to share ownership for specific equipment such as tractors and feeder wagons?
  • What liabilities might each party face in those same circumstances? What will your ongoing responsibilities be?
  • How easy or difficult will it be to transfer your interest in the venture? What will happen if a party dies?
  • What will be the effect of the arrangements on your Single Farm Payment?
  • How will your respective interests in land affected? Are there any planning implications?
  • Will your quota be affected?
  • Who will control payments in and out in relation to the sharing arrangement?
  • Will existing assets be transferred to, or new assets bought by, a new jointly owned entity or will you keep ownership of your respective assets?
  • How will you make important decisions and what happens if you disagree or there is a dispute?
  • How will you divide profits and when will profits be distributed?
  • Can you be obliged to provide further finance or guarantee obligations in relation to further finance?
  • Will milk be sold separately or combined?
  • How will you decide on buying supplies?
  • Are there any specific grants available for adopting a particular structure?


Legal Structure

Whilst considering the above issues (and many more) you will also need to take advice on the exact legal structure for your sharing arrangement. Several potential structures are set out below. Whichever structure you decide to adopt, you should set down in writing, ideally with help of specialist advice, how you have agreed to deal with the above legal and commercial issues. This will give you something to turn to should a dispute subsequently arise; the process will also help you better understand the arrangements that are being put in place, thus minimising the likelihood of a dispute arising.

A contractual arrangement: This would involve the two or more parties agreeing to share particular resources, whether that be equipment or labour or land. No new legal entity is formed. Advice should be obtained on whether the arrangement might inadvertently create a partnership. Where land is involved, specialist agricultural property advice should be sought particularly where some of the land involved is held under a tenancy.

Limited Company

A new jointly owned company is formed. This could be used as a cost centre so that the accounting basis of joint venture is more transparent and the parties can clearly trace the inputs and outputs of the sharing arrangement. Alternatively, in a full merger situation, the company could have transferred to it the parties' respective businesses and assets. A company structure offers limited liability to its owners as well as flexibility in terms of voting and dividend rights and transferability of interests. It does however mean that certain personal and financial details will be open to inspection by the public and there are ongoing administrative requirements. Directors should also understand their obligations under the Companies Act.

Co-operative/Industrial & Provident Society

An I&PS could be used in the same way as a company. Defra has in the past provided grant funding for some dairy joint ventures forming themselves as an I&PS. This type of legal entity is slightly less flexible in several ways than a limited company structure.

Partnership

A traditional partnership structure can form the basis of a limited or large scale collaborative arrangement. There are fewer formalities involved in the creation and unwinding of a partnership (as opposed to a company) structure and the partners' financial details can be kept private. Partners do not however benefit from limited liability and so will each be personally liable for the liabilities of the business.

Limited Liability Partnership

An LLP combines limited liability for its members with the tax treatment of partners in a traditional partnership and may be attractive for that reason. This type of structure is similar to a company in terms of setting up costs, ongoing administrative requirements and the need to publicly file accounts and disclose details of members.

In conclusion, collaboration certainly presents many opportunities, but it is essential that you think through and carefully document the nature of the arrangements you are putting in place.

Source: Thring Townsend Solicitors, 2007

Jonathan Poole
Thring Townsend
01225 340 163
Email Jonathan

Duncan Sigournay
Thring Townsend
01225 340 064
Email Duncan