So, when a husband and wife, or father and child farm together (as is the norm) they have created a partnership.
This will be an oral partnership and governed by the 1890 Act. It’s a very simple piece of legislation offering basic guidance on how partnerships operate e.g. profit sharing; the death or retirement of a partner automatically brings the partnership to an end (dissolves the partnership); voting rights (with no deadlock provisions) etc.
Due to this lack of detailed guidance, Napthens has for many years been advising its clients to document their business arrangement – whether by way of a farming partnership or a shareholders agreement.
More recently, banks have required this as part of any new security instructions. This is because without a written agreement, the death of a partner would mean the partnership has been dissolved under law. The bank would then freeze any accounts in the name of the existing partnership and be required to set up new accounts.
This is only one reason to set up a partnership agreement. Others include being able to agree terms such as:
- Uneven profit share/variable profit share
- What is/not a partnership asset – this can be important for BPR and APR relief claims on death
- Purchase option – an option for continuing partners to purchase an outgoing partner’s share in the assets – and the terms of the option e.g. book value or market value, lump sum payment or instalments etc.
- How votes will be decided in a deadlock
- Options to expel a partner who may have lost capacity, to enable the partnership to continue unimpeded
- Agreement that the partnership continues in the event of death or retirement of a partner, and the appointment of new partners (under the Act this would be deemed dissolution of the partnership and starting of a new partnership)
- Setting spending limits for junior partners/allowing for salaried partners.
Clearly, in most cases a partnership agreement won’t be referred to day to day, but it is there as an insurance policy in the event that things don’t go as planned. There is a cost to the agreement, but as with any form of insurance it is there to save you much larger costs in the event of a partnership breakdown or dispute between the parties.