Are you ready to diversify your farming business?

read time: 4 mins

With increasing energy costs, lower food prices and the real impact of Brexit yet to be felt, many of Britain's farmers are having to find new ways to make money.

Would you like to grow and embrace a new challenge? This could be opening a farm shop, setting up a glamping business, processing the food you grow or something on a larger scale such as allowing wind turbines to share the land with your sheep. Whether your plans are big or small it is useful to take a step back, look at where you are now and look at where you want to go.

What is your current legal structure? Are you a sole trader, partnership, limited liability partnership or a company?

A sole trader runs a business alone, makes all the decisions affecting the business and owns all the assets of the business personally. There is a lack of legal formality and low admin costs to get the business up and running as the business doesn't need to register or have a 'rulebook' to govern how it is run. A sole trader is personally liable, without limit, for all of the debts and other liabilities of the business.

A partnership exists when two or more people carry on a business in common with a view to profit. The Partnership Act 1890 (yes that old!) provides the law upon which partnerships operate, however most partnerships have Partnership Agreements in place to govern how they are run. Please see our previous article which explains why this is important. Each of the partners are liable for the entire amount of the debts and obligations of the partnership and the wrongful acts or omissions of their fellow partners, so it is important to trust who you are working alongside. There is no separation between management and ownership and no need to register publicly documents at Companies House.

A company is a trading vehicle in its own right, it is a separate legal entity from the people who own it (shareholders) and manage it (directors). The main source of law which provides the 'rules' for companies is the Companies Act 2006. A company can be limited by shares or by a guarantee (this is usually used for non-profit making functions). A company can own its own assets and is responsible for its own debts and liabilities. The shareholders hold shares in the company which have a nominal value attributed to them, usually £1. As the company grows the value of these shares can increase.  The directors of a company must file various documents at Companies House and a company also has a 'rulebook' called Articles of Association which govern how it operates and governs the relationships between the shareholders and the directors.

A limited liability partnership (LLP) is a hybrid between a partnership and a company which has a separate legal personality from its owners. It can hold its own assets and is liable for its own debts. The partners have financial exposure to the extent of their capital investment in the LLP. There is no separation between management and ownership. An LLP has to be registered at Companies House and has ongoing filing requirements. An LLP Agreement should be drawn up to govern the relationship between the members of the LLP.

It is important to consider your current legal set up and whether this is sufficient for your upcoming plans. Ask yourself these questions:

  1. Does the business want to make a profit?
  2. Do you want the liability of the people who are running the business to be limited?
  3. Do you need separation between the people who run the business and the people who own the business?
  4. How is the business funded? Does your funder have a preference for a particular legal structure?
  5. Would you like a 'rulebook' of how to run the business? This could cover things such as who makes decisions, what happens if someone wants to join/leave the business and how everyone in the business is rewarded for the work they do.
  6. Will the business need to borrow money to expand? What security could be provided i.e. a personal guarantee from someone or a charge over the assets of the company?
  7. Do you want to divide up different parts of the business? This may be for tax or succession planning reasons.
  8. What does your accountant and tax adviser say? A legal structure should be considered alongside financial and tax planning.

For further information on this article please contact Jonathan Croley.

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