Diversification is a key way for farm businesses to generate additional income, create resilience in economic uncertainty and provide succession opportunities for family members. There is, however, a degree of risk that comes with venturing into an unknown, and sometimes untested, commercial enterprise.
One way of limiting this risk is to establish a limited company or a limited liability partnership, both of which are separate (and have a distinct legal ‘personality’) from the individuals that are involved in the diversification initiative. This protects those individuals and their personal assets and limits their exposure to liability if things do not go as planned.
In this article, we describe briefly some of the more commonly used business structures that may be appropriate for diversified business ventures (“enterprise”) and explain the key advantages and disadvantages of each, in terms of limiting personal liability and ring-fencing risk.
| Type of business structure | Brief description & key features | Advantages | Disadvantages |
|---|---|---|---|
| Sole Trader | One individual establishes and is entirely responsible for the operation of the enterprise.
A sole trader does not have a distinct or separate legal personality so the sole trader must sign contracts and hold assets in their own name. |
The sole trader has full control over the business and makes all management decisions.
The sole trader does not have to file any publically available documents, for example accounts, so can maintain complete confidentiality over the performance of the business. There are not any set-up costs and there are nominal administrative and ongoing expenses involved. All profits of the enterprise belong to the sole trader. |
The sole trader is personally liable for all of the losses and the debt of the business enterprise. If the enterprise fails, the creditors of that business will have recourse to the personal assets of the sole trader.
The sole trader is responsible for the performance of all contractual obligations (as they have signed in their own name) and the maintenance of all assets (as they are owned by the sole trader). This option does not offer any protection against the business risks involved in a new enterprise. |
| General Partnership | A general partnership is established by two or more individuals with the aim of operating a business in common together.
It does not have a separate or distinct legal personality from the individual partners involved. So the individual partners sign contracts and hold assets in their own names for and on behalf of the other partners. A Partnership Agreement between the individual partners should be completed, setting out the rights and duties between the partners. In the absence of an agreement to the contrary between the partners, the terms of the Partnership Act 1890 will apply. |
In the absence of anything agreed to the contrary, each partner has an equal right to participate in the management of the diversification partnership business.
There is no obligation to enter into any constitutional documents as between the individual partners involved, although a Partnership Agreement is strongly advised. Much like a sole trader, there are no public filing obligations and the performance of the partnership business can remain confidential. In the absence of anything agreed to the contrary, all of the profits belong to the partners equally and the profits are tax transparent, i.e. they are taxed in the hands of the partners. The partnership is not subject to any corporation tax on its own account as it is not a separate legal entity. |
The partners in a general partnership are jointly and personally liable for the debts and obligations of the partnership business. As above, if the enterprise fails, the creditors of that business will have recourse to the personal assets of the partners.
The partners are responsible for the fulfilment of all contractual responsibilities between them and each partner is liable for the wrongful acts or omissions of their fellow partners. As above, this option does not offer any protection against the business risks involved in a new enterprise, although there is scope to involve different people with different areas of expertise and mitigate risk that way. |
| Limited Liability Partnership (LLP) | An LLP is a general partnership and private limited company hybrid.
An LLP must be formed by at least two members and is an incorporated entity with a separate legal personality, distinct from its members. The LLP can enter into contracts in its own name and hold assets in its own right. The members of an LLP can decide on the division of the management responsibilities; the split of profits and the amount of capital to be contributed (if any). In the absence of any agreement to the contrary, the members will be equally entitled to participate in the management of the LLP and take an equal share in the capital and the profits of the LLP. |
An LLP is liable for its own debts, contractual commitments and other obligations and can be sued in its own name.
The liability of the members is limited to the amount of capital that they have contributed to the LLP (if any) and the members are not obligated to contribute anything further if any loss is suffered by the LLP. If the business fails, the creditors of the LLP, generally, do not have any recourse to the individual members involved and their personal assets are protected and preserved. The taxation of an LLP follows that of a general partnership: the LLP is not subject to corporation tax and the profits of the LLP are taxed in the hands of the individual members. |
An LLP must be incorporated and registered at Companies House and comply with statutory commitments, including annual accounts and annual confirmation statements. This creates an administrative burden and expense and means that some documentation relating to the LLP is publically available. |
| Private Limited Company | A private company is a body corporate that must be incorporated with at least one shareholder and one director and registered at Companies House.
The shareholders are the owners of the company and the directors are responsible for running the business of the company. The directors make all management decisions, subject to their director duties and any decisions that are reserved for the shareholders. The shareholders may be the same people as the directors or they may be different. The company is a distinct legal entity from its owner-shareholders and its directors. |
A company enters contracts in its own name and holds assets in its own name. It is liable for its own debts, contractual commitments and other obligations and can be sued in its own name.
The liability and exposure of the shareholders is limited to the amount that they have paid (or are required to pay) for their shares. If the diversification business fails, the creditors of the company do not have any recourse to the individual shareholder-owners and, in the absence of any wrongdoing by the directors, will not be able to recover anything from the directors either: the personal assets of the individuals involved are protected and preserved. |
A company must be incorporated and registered at Companies House and there are ongoing statutory requirements, including the preparation and filing of annual accounts and confirmation statements, which will create administrative responsibilities and expense for the business.
The shareholder-owners right to receive profits is limited to receiving dividends declared by the company. The company is subject to corporation tax on all profit generated and the shareholders and directors are separately and in addition taxed on the dividends and remuneration that they (respectively) receive. |
The right option for a business will always depend on the personal circumstances of the owner; the key outcomes that are desired; the tax implications of each option; and familiarity with the diversification proposal, including an assessment of the risks involved and the likelihood of those risks materialising. All the options and their consequences should be considered whenever setting up a new enterprise or restructuring an existing one.
Michelmores are looking forward to putting on another Agriculture Roadshow, between 3-7 February 2025. Following the success of our tour last year, we are going...
