Business Clinic: What happens to a farming partnership after a death?

Farmers Weekly’s Business Clinic experts offer free advice on legal, finance, tax, insurance, farm management and land issues.

Jane Oakland, partner at Thrings, looks at some of the complications that can arise when a member of a farming partnership dies.

Q I am a partner along with my mother and father in our family farm business. Please could you tell me what the business situation would be if one of the partners dies? Does this automatically dissolve the partnership or does it continue with the two remaining partners?

A Partnership is a relationship that exists between people carrying on a business with a view to making a profit. Many find themselves in partnership without necessarily calling themselves a partnership because the way they behave in conducting the business reflects this type of arrangement.

Unlike a company, there is no requirement for a written constitution (rules to govern the relationship between partners) and many consider it unnecessary to have a formal partnership agreement in place.

In the absence of a partnership agreement, and where nothing has been agreed to the contrary, the Partnership Act 1890 (PA 1890) provides a statutory default position.

See also: Business Clinic – How to deal with partnership breakdowns

Having no agreement may be all good and well while everything is running smoothly, but unintended consequences can arise when there is a change or issues occur. This can be extremely stressful, timely and expensive to resolve without a clear agreement.

The default position provided by the PA 1890 is not tailored to the specifics of any partnership and, where the default differs from the position assumed by one or more partners, this leads to difficulties.

On the death of a business partner, with no contrary agreement, the PA 1890 states the partnership is dissolved, regardless of how many partners remain able or willing to carry on the business.

The remaining partners must sell off the business and its assets. The personal representatives (PR) collect the deceased’s entitlement from the dissolution of the partnership.

Rarely, if ever, is this intended for a family farm in particular, where the land is often to be protected for future generations, and not something you would want to deal with when coming to terms with a death in the family.

There is nothing to prevent you continuing the family business under a newly formed partnership, but will that partnership have the resources to do so? The estate would take out the deceased’s share and there may insufficient cash left to continue business as usual.

Remaining partners may have to sell business assets to raise money or, alternatively, raise finance. If the remaining partners cannot do so and the business has debts (after it has paid the deceased’s PRs) your personal assets (as partner) could be at risk.

There is no liability limited to a specified amount in common partnership. You should always consider the risk of personal exposure to creditors in any event as a partner. 

Differences of opinion on the business, introduction of new partners and retirement are just a few issues that arise in the life of any partnership.

Partners can find themselves trawling through old correspondence in an attempt to show contrary intentions to the statutory position, or for evidence of what was agreed with other partners, often parents or other family members, where there may be no written record and it becomes one recollection against another.

This is made all the more difficult when a death occurs. It can lead to distressing family disputes and should be avoided. 

A partnership agreement can also ensure rights regarding the land (or other assets) being used for the business to remain with the ongoing partners, and to control the financial burden of payments on buy-outs or, on death, to personal representatives.

The agreement details the contract on how your business will operate between its partners. It is recommended that it is in writing in one document, which can be varied if circumstances change, to avoid those distressing uncertainties and arguments.

Terms commonly include the management and control of the business, profit and loss allocation, introduction of new partners, buyouts and the resignation, retirement, removal or death of a partner.

Importantly in your case, an agreement can also provide for the valuation and payment of the outgoing partner’s share, so protecting both the deceased partner’s estate and the ongoing business.

Partners are well advised to understand the position under the PA 1890 and evaluate how these fit with the specifics of their own partnership. So often they don’t, and a partnership agreement is essential.

Family conversations to agree such a fundamental arrangement can be challenging, but much less difficult to have while everyone is well and the business is running smoothly.

The information provided in these articles does not constitute definitive professional advice and is provided for general information purposes only.