Business structures: why farmers should care

This article was first published in Farmers Guardian in February 2022 as part of a media partnership.

It is a stereotype, but the Country Land and Business Association (CLA) says it is all too true that farmers become so busy farming that getting their business affairs in order is often an afterthought.

Burying heads in the sand when it comes to subjects such as succession is well-documented among the agricultural community, but before any of these big debates can be had, the actual structure – a business’ very foundations laying down how it operates – needs to be in place.

Sole trading and partnerships are the most common structures used in farming.

A limited company, on the other hand, is a structure which recognises a business as a separate legal entity to its owners; making them only liable for the amount of share capital they have rather than any additional wealth or assets.

Louise Speke, the CLA’s Chief Tax Adviser, says many farming families’ accountants suggest they go down the route of becoming a limited company. But this can involve significant additional administrative costs which are not always strictly necessary.

“Setting up a limited company might have been the right thing for farmers for tax reasons previously but they can be problematic for later generations because it is expensive for non-farming family members to extract their share of the assets from the company,” says Louise, who previously worked as a solicitor.

“Likewise, changing family dynamics – more members of the family becoming involved because of a diversification – may mean it is time to review the business and set up or change the partnership arrangements or set up a limited company to operate that new business venture. “It is important farmers know what the options are and that they don’t blindly go down one route because they’ve never looked at alternatives.”

When a business is started there is usually a very clear view about its future and this is the obvious time to get that business structure worked out.

Louise says: “It sounds morbid, but it makes sense to imagine what would happen to the business if somebody on the farm lost capacity – through a farming accident, for example – or if there was a sudden death.

“If you are not going to be around, the paperwork has to be in place to make sure the farm you have worked so hard in establishing continues in the way you would want. It is a lack of paperwork, such as a partnership agreement, which can trigger disputes or mean the partnership ends on the death of a partner.

“Imagine two siblings farming together and one decides they are retiring. With nothing written down about retirement in the business’ structure documents about how this will work, there is no reference point.

“Rural businesses are unusual in that they are more diversified, with more income streams than perhaps a restaurant, hairdresser’s or plumber’s.

“The foundation stone of a business is its legal structure. It is so important to recognise that a business is an evolving thing, something which needs to be taken stock of on a regular basis – is the structure in place still the right one for the business and are the right people involved?

“A way of doing business which suited previous generations may be the wrong one for today. Unless the right business documents are in place, it is very difficult to go on and tackle other subjects – from the basics such as operational decisions, to the big ones such as succession, inheritance and taxation.”

Often the choosing which business structure to use will be a commercial decision but from an inheritance tax point of view, it is important to establish whether or not assets are owned by the farming business or just used by it.

Other key considerations are how any farm profits are to be divided, what records need to be kept and attitude towards information about the farm, such as accounts, being public. While sole traders and partnerships can keep finances confidential, going down the limited company route involves the business being registered at Companies House, with financial details, such as the profits, borrowing and assets in the company, visible to the public.

Louise says: “Here at the CLA we know how hard farmers work. All that work can be to no avail if the paperwork – the business structure – is not in place.”

The CLA’s professionally qualified advisers have the expertise to give impartial advice on what you need to consider when thinking about the right structure for your business. This can include whether a partnership or a company is right for you to use or whether your new business venture should be part of your existing business or run as a separate enterprise. It will also advise on the tax implications of the options you are considering, including the impact on succession planning to transfer your business to the next generation.