Regardless of whether they make use of traditional and time honoured farming methods, many farms are run along traditional lines as family owned and operated businesses and other than in the case of large commercial businesses most farms do not take advantage of modern business structures such as limited liability companies. Instead the head of the family operates the business as a sole trader and once his children are old enough to help out with the management of the farm, the business usually becomes a partnership.
Legal Informality in Agricultural Businesses Special rules have traditionally applied to the taxation of farming businesses and to the way in which these businesses make up their accounts and these rules have often been more lenient that those applied to most other businesses - for example, allowing farmers to estimate the value of certain items in their accounts rather than provide definite figures.
Together with the fact that the demands of managing the farm leave farmers with little time for paperwork, this has resulted in a high level of legal informality within the agricultural sector. For example, the terms of a partnership are often not set out in writing and there can sometimes be a great deal of confusion about the property which belongs to the partnership and the property which belongs to individual family members
Importance of a Partnership Agreement There are no legal formalities for creating a partnership, and it is possible to run a business as a partnership without ever putting this in writing. However, this is not advisable because in the absence of a formal partnership agreement, the law will impose certain terms into the partnership which may not be desirable. In addition, if a dispute arises amongst the partners (or even between the partners and members of the family who are not partners) extended court action might be necessary if there is no clear statement of the partnership.
A specialist agricultural law solicitor can often draw up a partnership agreement which specifically meets the needs of a farming business quickly and easily. An agreement of this type can help to prevent disputes from arising by clearly defining the rights and responsibilities of all members of the partnership.
Importance of keeping proper legal records - a case study In the recent case of Longmuir in the Inner House of the Scottish Court of Session, the court considered the application of partnership law to a farming business.
In this case a father and son ran a farm as a partnership. The son bought a neighbouring farm and registered it in his own name, using money from a partnership account to make the purchase, which he later replaced. When the father died suddenly without leaving a Will, other family members argued that the neighbouring farm had actually belonged to the partnership and that half of it should therefore pass to the father's heirs, whic h included the son's several sisters.
The court decided that because the money used passed through a partnership account, it was presumed that the property which was purchased belonged to the partnership even though it was registered in the son's name. If there had been clear records indicating that the money was being loaned to the son, then the court would have reached the opposite outcome. However, as a result of this decision the son lost half of the neighbouring farm. The message is clear that farming partnerships need to keep clear records of all transactions and should have formal legal partnership agreements in place to avoid disputes of this nature.