Legal aspects

This can be a partnership, limited liability partnership or limited company by share. The later are the most commonly used, however legal advice should be sought from your solicitor on the most appropriate vehicle to deliver the goals and objectives of your prospective partnership.

Farm Business Tenancies and Contracting Farming Agreements are in some ways collaborative in that one person is providing the land and the other providing the machinery, labour and inputs. The rest of this note however considers those arrangements where machinery is shared.

At its simplest there is a machinery sharing arrangement. Sometimes one person buys say a drill and another a combine and they each use them on both their farms. Otherwise they may jointly purchase the combine or the drill. There should be a simple agreement for a joint purchase.

The type of things to bear in mind are the shares in which the machine is owned, insurance, responsibility for repairs, where it is to be kept and how one determines when and where it is to be used.

These arrangements do not make any difference to the trading entities. A share of the machine will be shown in each business's balance sheet. Full blown trading entities are likely to be one of the following:

An Ordinary Partnership

A Partnership is extremely flexible and in many ways is the easiest arrangement. Many people however are uncomfortable with the liability aspect and therefore prefer a Limited Liability Partnership or a Company.

Limited Liability Partnership

A Limited Liability Partnership is a corporate entity structured like a Company. Instead of a Board of Directors there are Designated Members of the Partnership who will be responsible for management. However in most ways it is taxed like an ordinary Partnership. It is more flexible than a Company and there is more flexibility with the tax treatment.

A Limited Company

Some people prefer to have the formality of a Company and to use a structure that they are comfortable with. This will be chargeable to Corporation Tax rather than Income Tax. Most sums put in to run the Joint Venture (which will be largely represented by the value of the machinery) will be structured as loans rather than business capital.

Legal factors to consider when setting up a collaborative venture:

  • Before setting up the venture it is always imperative to take proper tax advice. Any sales of machinery may trigger a balancing charge. The tax position of the new entity going forward needs to be explored and understood.
  • The position regarding employees will have to be borne in mind. If they become redundant then the situation will need to be properly handled. The transfer of undertakings rules will need to be considered. Often employees stay behind in the farming business.
  • How the business is to be financed will need to be discussed. Generally speaking it is thought better that the operating farming businesses finance the business rather than it borrowing much money itself.
  • Depreciation policy and philosophy for machinery will be needed.
  • How long the agreement should last and how it should be brought to an end will need to be borne in mind. In most cases if somebody wants to leave the arrangement the others would want the right to buy his share.
  • Each of the farming businesses will effectively be employing the Joint Venture entity as a contractor and the Inheritance Tax implications of this will need to be considered and terms agreed.

Source: Roythornes Solicitors (2007)
www.roythorne.co.uk