Business Structures for Agricultural Success
UK agriculture is one of the most important and dynamic sectors of this country's economy, we have seen a significant transformation over the past few decades. We fuel the nation, employ thousands, and play a vital role in rural communities.
Agriculture is no longer limited to traditional farming practices, when embracing change, we also need to understand the range of commercial business structures and arrangements to optimise our operations, increase our profitability, and mitigate risk.
In this article, I will explore some of the most popular commercial business structures and arrangements that are being used in UK agriculture.
Sole Trader
A sole trader is the simplest business structure in which a single person owns and operates the farm or agricultural business. This is easy to set up and manage, and the owner has complete control over the business. This structure is common in smaller farming operations. In this type of farm business, the owner has complete control over the decision-making process and is solely responsible for the liabilities and debts of the business. An example of a sole trader is a small family-owned farm who can benefit from the flexibility and autonomy that comes with running their own business.
Partnership
A partnership is a business structure where two or more people own and operate the farm or agricultural business. Partnerships can be formed to pool resources, share responsibilities, and share the burden of financial risk. In agriculture, partnerships are common between family members e.g. Dad, Mum and son or two brothers, who share land or equipment. Quite often in the initial stages of the partnership the older generation retain the ownership of the assets whilst the partnership benefits from the enthusiasm and fitness of the younger generation, at some point and dare I say it, before it is too late the older generation need to let go of the reins to allow the youngsters make some mistakes whilst you’re still there in support. The partners all share the profits, losses, and risks of the business. A partnership agreement is essential to outline the roles and responsibilities of each partner and to establish the terms of the partnership relationship.
Limited Company
A limited company is a separate legal entity from its owners. The company can own assets, enter into contracts, and sue or be sued in its own name. The owners of the company are shareholders, who are not personally liable for the debts or liabilities of the company. This structure provides a high level of protection for the owners, but also involves more regulatory compliance and administrative obligations. It is a popular choice for agricultural businesses that want to protect their family assets and limit their financial risk. Limited Companies are common in larger commercial farming operations and ones that add value to raw products and sell direct to the consumer.
Limited Liability Partnership (LLP)
An LLP is a hybrid structure that combines the benefits of a partnership and a limited liability company. In an LLP, the partners are not personally liable for the debts or liabilities of the business. This provides the partners with the flexibility of a partnership and the protection of limited liability. This business structure is particularly useful when multiple partners want to share management and operational responsibilities but also want to limit their personal financial exposure. LLPs are common in larger agricultural businesses, and ones where the partners may not be family members, for instance, a machinery ring.
Contract farming
Contract farming is an arrangement where a farmer agrees to produce a crop or livestock for a buyer/landowner, according to predetermined specifications and quality standards. The buyer/landowner provides the inputs, such as seeds, fertilisers, or animal feed, and buys the output at a predetermined price e.g., poultry and pig sectors or in case of an arable arrangement the landowner may sell to a third party. Contract farming provides a guaranteed market for the farmer’s hard work and reduces the risks of market fluctuations in the case of the pig sector. However in an arable arrangement the landowner is more susceptible to market forces. An example of contract farming agreements could be heifer rearing, broilers, or contract farming agreement on arable land.
Cooperative
A cooperative is a business structure owned and controlled by its members, who share in the profits and decision-making process. Agricultural cooperatives are formed by farmers to pool resources, share risks, and market their products more effectively. An example of an agricultural cooperative is a group of dairy farmers (Arla) or soft fruit growers (British Berry Growers) who join forces to process and market their milk or fruit collectively.
Joint Venture
A joint venture is a business arrangement whereby two or more parties agree to contribute resources, such as capital, land, or expertise, to carry out a specific project or venture. The parties share the risks, rewards, and profits of the project. Joint ventures can be set up as a separate legal entity or a contractual arrangement. This arrangement is common in agriculture, where farmers may partner with other businesses to market their products or collaborate to develop new products or technologies. An example of a joint venture in agriculture would be a group of farmers working with a technology company to develop new precision farming technology e.g. Small Robot Company, where there is an appetite for farmers to work with early stage technology, if farmers were limited to their exposure to the risk of functional failure.
In fact, it's not uncommon for agricultural businesses to use multiple business structures and arrangements at the same time. Here are a few examples of how this can work and why:
Limiting liability and protecting assets
A farming partnership alongside a limited company:
One of the primary reasons to use multiple business structures is to limit liability and protect assets from potential legal claims or creditors. For example, an existing farming partnership may use a separate limited company to conduct certain high-risk activities, such as developing and marketing a new product (milk at the farmgate, pressing rapeseed, insect protein), to protect the assets of the core farming business. By keeping these activities separate from the core farming business, the partners can limit their personal liability and protect their family assets.
A family farm that is structured as a partnership with a trust:
In this scenario, a family farm is structured as a partnership between siblings. However, the siblings also want to ensure that the farm stays in the family for future generations, so they create a trust that will hold the farm assets and distribute them to their children and grandchildren. The partnership ensures that the farm is effectively managed, and profits are shared fairly, while the trust provides a mechanism for passing on ownership and protecting the farm from potential creditors or legal disputes.
A farming cooperative that also has a subsidiary limited company:
In this scenario, a group of farmers come together to form a cooperative, with the goal of pooling their resources to purchase inputs and market their products. However, the cooperative also recognises that there may be opportunities to expand their business beyond just farming, and so they create a subsidiary limited company to explore these possibilities. For example, the limited company might be used to develop and market a new agricultural technology product, to rent additional land for high risk, high margin crops or enter the renewable energy market or even the synthetic protein market. By using a subsidiary limited company, the cooperative can take advantage of new opportunities without risking the core business(s).
Optimising the tax benefits
Different business structures and arrangements may offer different trading profit taxation benefits depending on the circumstances. For example, a farming partnership may allow for more favourable tax treatment of losses and deductions than a sole proprietorship. By using multiple structures and arrangements, an agricultural business can take advantage of the most favourable tax treatment for each activity or investment.
For example, partners who are higher rate taxpayers at 40% and wish to reinvest in the business e.g by buying another farm, may be more tax efficient investing within a limited company where the corporation tax rate is 25% allowing the accumulation of cash and wealth in a limited company structure where debt can be repaid with less profit as an additional 15p in the pound will be available after tax.
In conclusion
UK agriculture must navigate various commercial business structures and arrangements to optimise their operations, increase their profitability, and mitigate risks. Each structure has its own advantages and disadvantages, and the choice depends on various factors such as the size of the business, the nature of the operation, and the level of risk involved. By carefully considering the available options, agricultural businesses can choose the structure that best suits their needs and achieve their business objectives whilst considering the most effective structure to optimise their tax position and protecting their assets.
Overall, business structures and collaborations are important tools for agricultural families to achieve their goals and expand their operations. By working together with other entities, businesses can leverage their resources, expertise, and networks to create new opportunities and achieve greater success.
Cooperation and collaboration between farmers and the integrated supply chain will be paramount to a farm’s success. To reduce the waste within the food supply chain, we need the individual sectors to integrate which needs to incorporate and consider the environmental impact.
Holistic approach to integration and sustainability - here is one idea
Renewable energy combined with batteries, e.g., solar panels/wind produce the energy for a data storage unit which creates the heat for insect protein production fed on food waste which supplies the pet food market – this circular economy of carbon will drive cooperation and collaboration vertically and horizontally in the agricultural sector.
Mark Seager FCCA
Director
Mark previously worked alongside one of our directors, Dan Knight and our Senior Tax Manager, Victoria Paley at a regional practice. Mark brings along a wealth of experience in both accountancy and rural life having grown up helping on his family farm with both the practical side and the VAT returns from an early age. His passion for agriculture, interest in business and desire to help others grew after he graduated from Harper Adams University.
Mark specialises in business strategy, structure and tax planning with agriculture.