The pros and cons of partnerships versus company status for farmers

QI have been following the recent articles on farm partnerships but I have been advised in the past that entering a limited company would be a good option for me. What are the main differences between a partnership and a limited company? Are there any pitfalls to be aware of with these business structures?

AThe main difference between a partnership and a limited company is that an entirely new legal entity is created by forming a company. This new entity, while controlled by the directors, is a separate legal being from the farmer, who is a director and shareholder of the company. A partnership is the joining of, typically, two self-employed farmers, who wish to combine their efforts and split the proceeds that they make from the joint effort. In this context there is no new legal being created.

Here are reasons to consider changing your business structure.

TAX EFFICIENCY

The main factor which entices people to enter a new business structure is greater efficiency and, mainly, tax efficiency. For farmers (and their spouses) who are taxed at the higher rate, they must pay tax at in excess of 50pc for the portion of their income which falls into the higher band.

This can make it difficult to accumulate money in the business over time, as the farmer is returning over half of what he is making in tax.

The benefit to operating in a private limited company is that the company pays corporation tax at the rate of 12.5pc on its profits.

This makes it easier to accumulate money in a company for reinvestment and other purposes.

It is important to stress that a farmer who is a shareholder of the company and who draws out some of the money that the farm company makes must pay income tax at the ordinary rate.

For those farmers with relatively low need for personal drawings from the farm (by comparison to the total profit that the farm business makes) he or she would likely be better off farming in a company structure.

If, however, your drawings are close to the total profit of the farm, then there is little or no benefit to operating in a limited company.

This is because there are some additional costs to operating as a limited company, which would not arise for a self-employed person/partner in a partnership.

For example, a company tax return tends to cost more than a personal tax return.

DEPARTMENT OF AGRICULTURE/EU SCHEME BENEFITS

For farmers at different stages of their career, there will be inevitable differences in priorities. For example, many young farmers starting out will be eager to expand or improve farm infrastructure and so investment will be a priority.

In this context, partnerships have, in some circumstances, more beneficial access to certain schemes.

A good example is the TAMS II, whereby partnerships with a qualifying young trained farmer will be able to draw down a greater amount of funding than two similar farmers who are not in a registered farm partnership.

Many of the schemes do not afford this benefit to limited companies even in circumstances whereby one of the directors/shareholders meet the same criteria as a young trained farmer.

LIMITED LIABILITY

The post-boom years saw a greater focus on liability for payment of loans and losses. In the vast majority of cases, for the purposes of accessing bank finance — whether you are borrowing in the name of a limited liability company or not — the financial institution will require a personal guarantee.

It is only if the loan is not personally guaranteed by the directors/shareholders that the liability for paying the loan will be limited to the assets owned by the limited liability company.

In the context of a partner- ship, both partners are liable for the repayment of loans in the terms agreed in the loan agreement.

OWNERSHIP AND SUCCESSION

Both a company structure and a registered farm partnership offer different ways to prepare for succession or the handing-on of the family farm.

For example, the last budget introduced a tax incentive for those entering a farm partnership with a view to transferring a portion of the farm assets during the duration of the partnership.

Caution is advised before entering any such agreements insofar as you should consult with a professional adviser on your individual circumstances before entering any such agreements.

PARTNERSHIPS OFTEN HAVE BETTER ACCESS TO SCHEMES