Farming and the Law: David Cammack on options for farm business structure
VARIOUS forms of business structure are available to farmers, including a company limited by shares (limited company), an LLP (limited liability partnership), a partnership and trading as a sole trader (or sole proprietor).
: : Sole trader: This is only available where one person owns the business. No registration is required before trading begins. Income tax is payable on profits generated each year, so there is no tax incentive to plough back profits into investment the following year. Bringing one’s spouse into the business via a partnership may be more tax efficient. However, the sole trader lacks any limited liability protection: if the business goes bust the owner is liable for debts.
: : Partnership: To run a partnership more than one person must own the business. Each partner is liable for income tax and self-employed National Insurance contributions, similar to the sole trader. Partners have no limited liability protection unless they upgrade to a LLP. A partnership agreement is advisable although without one the Partnership Act 1890 gives some protection. However, it will not safeguard against all problems, e.g. the lack of a notice period should a partner leave.
: : LLP: In an LLP members are taxed as partners in a partnership but they benefit from some limited liability protection. This protection is not as simple or comprehensive as in a limited company, but considerably better than nothing! A LLP members’ agreement is needed and the LLP must be registered at Companies House before trading can commence. Registration is a paper process and fairly quick (online formation is not yet available).
: : Company limited by shares: This is suitable for single or multiple owners, who benefit from the best available limited liability protection; unless there is serious misconduct they are not normally liable beyond the capital paid for their shares should the business go bust. The company must be registered at Companies House – a simple process that can be done online – before trading. Where more than one person owns shares, a shareholders’ agreement will ensure that should anything happen (retirement, death or dispute) the ownership of the company can be resolved simply. As Corporation Tax rates are often lower than combined Income Tax and self-employed NI rates, it can be tax-efficient, particularly where the owners intend much of the profit to be re-invested.
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The most tax efficient structure will depend on your level of profits and long-term plans. Always consult your adviser regarding tax issues before any change of business structure.
: : David Cammack is a partner at Essex-based law firm Birkett Long
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