Dissolving a partnership or not? (or do all good things have to come to an end!)
A business transition to the next generation will often place two or more siblings in partnership. At this time, we often hear a desire from the participants to allocate land ownership, other assets and debt and split the business into separate enterprises.
Of course, it’s harder to break a bunch of twigs than each individual stick and farming businesses are no different. Apart, they are often weaker, together, they are more resilient. This advantage may not simply be due to the size of an operation. It may also be because of different agricultural business lines creating better cash flow and more stability.
A good example that comes to mind is an enterprise that combines a Seed Cleaning business with a farming operation. One area provides a good asset backing for a healthy balance sheet and the other, good cash flow to improve the profit/loss. The same can be said where there is a mixture of cropping and grazing. In many cases each partner has a particular interest in one part of the business and takes this with them upon separation.
Often, the desire to separate the business is an emotional reaction due to a lack of certainty, control and clarity about the future. It can be caused by problems in decision-making, roles and responsibilities or simply personality clashes.
The solution is to workshop an all-encompassing partnership agreement to address operational, management and equity issues. By establishing a clear set of guidelines and rules, future conflict can be avoided, disputes become less personal and solutions more pragmatic. This gives the partnership every chance of success.
If, however, continuing a partnership is not an option, careful consideration needs to be given to how the dissolution is dealt with to ensure the parting of ways is done with minimal conflict and anguish.
The first step is to examine any existing partnership agreements and the extent that they deal with the termination of the partnership or the exiting of the partner. Of course, the dissolution of the partnership will still be subject to the legislation governing the State in which the partnership is formed. If there is no partnership agreement, or the contract is silent on the matter of termination, the governing law of the State or Territory will apply.
To dissolve a partnership, the partner wishing to leave must usually give written notice to all the other partners making known their intention. If the partner does not specify a date, the time of dissolution is the date on which the partner communicates the notice.
Allocating debts can be a difficult exercise. Even if an equitable arrangement can be agreed upon, you will still need to speak to your Bank to understand their perspective. Partnership Law generally makes each partner jointly liable for all business debts incurred while they were a partner of the business. You should also consider consulting your accountant to ensure you have no outstanding tax liabilities. Any employees of the partnership must receive all their entitlements and superannuation contributions.
Several questions will need to be resolved:
• How will plant and equipment, livestock and produce be dealt with?
• What will be the tax consequences of transferring assets to a new business?
• How will this be best achieved?
In some cases, the partners may decide to maintain the original business purely to hold the existing assets and then transition them over time. For instance, buying new equipment through their new businesses and forming a collaborative farming agreement over the use of the existing equipment held by the original partnership.
When a partnership is dissolved, each of the original partners have the same rights and obligations. They remain responsible for the obligations of the original partnership and remain entitled to share in any surplus assets.
Utilising the services of an independent professional to mediate a satisfactory outcome and structure a sound transition plan can alleviate a lot of stress and potential conflict.
If the business is to be separated, it will be worthwhile to take the opportunity to consider what will be the most suitable structure for any new business moving forward.
Some of the factors to take into consideration in making the decision on the right business structure will include:
• The need for asset protection (particularly of farming land held in personal names)
• The introduction of other family members into the business at a future time
• Future succession needs for the family
• Tax concessions available
• Flexibility for future expansion, succession, tax minimisation
For instance, an important benefit of creating a new Farm Business Trust could be the separation of ownership between the farming land and the trading entity. In many cases, the farming properties and the business are both in the individual’s names. This affords no protection against liabilities which could emerge from the business and trading activities. By creating a Farm Business Trust with a Corporate Trustee as the operating entity, a separation of legal structures would occur, protecting vital land assets from business risks.
There are other issues to be considered and you should seek the advice of your accountant and solicitor. The future business structure should also be part of the overall transition plan.
Generally, our advice would be to do everything possible to keep a unified business. Most importantly, this involves the formalising of the business arrangements. By going down this path, even if you ultimately do decide to break up the partnership, you will know that you gave the existing arrangement every chance of success.