Advice: The pros and cons of partnerships versus company status for farmers
Q I 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?
A The 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.
1. 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.