5th September 2016

Written partnership agreements – why bother?

Mark Chanter, partner in our private wealth team highlights the importance of having a partnership agreement in place.

In farming, Partnership is a very common way of running a business and in lots of ways very flexible and suits generations of families really well. The document does not even have to be in writing to be effective, so why go to all the expense and trouble with lawyers to put it in writing?

I can tell you many reasons, some obvious, some less so. Firstly, if it is in writing, it is clear what the arrangements are. It is surprising how something as simple as this can cause argument and disputes which are readily resolved by looking at a written agreement.

Secondly, if you fall out, the law says that you apply a standard form of partnership agreement which is set out in the Partnership Act of 1890. This is now 126 years old and is showing its age! Much of the material remains good but not all. For example, if someone dies, the partnership automatically terminates. This not only causes immediate problems for those involved but can cause major problems with the tax man as this business is treated as having come to an end even if the other parties are intending to carry it on.

Another issue is if someone is included in the partnership to spread payment of income for tax purposes, if it is not in writing then it is assumed on a fall out the capital has been both contributed and is repayable equally, whatever the contribution. This can have serious unintended consequences. I was involved in a divorce case where the wife inherited the farm. The husband worked off the farm but did not have a high income and was paid an income from the business as a partner having made no capital contribution. When they fell out he claimed 50% of the capital assets which took some untangling!

Another situation where the lack of written agreement create issues is where a cottage owned by the parents outside the partnership where all the outgoing are run through the business. It is treated like something of a pension arrangement and is quite common. The standard partnership agreement says that assets used by the farm business form part of the partnership assets regardless of who receives the income. This is another issue that can cause a major headache with the tax man, as well as when or if a family fall out.

My final reason is that the 1894 agreement makes no provision for excluding something from the partnership. So however badly they behave, you cannot remove this partner without terminating the whole partnership with the difficult tax and other consequences I referred to earlier. You can see from the above, the answer to my original question is obvious – do bother. Having gone to the effort of forming a partnership, you need to get it set up in the best possible form for you to deal with any problems that may arise.

If you have any questions about this article, please contact Mark Chanter a partner in the Private Wealth Team on 01872 243346 or email mhc@footanstey.com

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