Partnerships - Commonly Used, Often Misunderstood

• Published date: 03 November 2021
• Subject Matter: Real Estate and Construction, Tax, Family and Matrimonial, Real Estate, Income Tax, Wills/ Intestacy/ Estate Planning
• Law Firm: Albert Goodman
• Author: Ms Kate Bell

Although partnerships are the most used business structure within the agricultural community, they are frequently misunderstood and can result in dispute.

Partnerships provide great flexibility for decision making, profit sharing and land ownership which can also aid both capital and income tax planning. However, this flexibility can also lead to a lack of clarity whether that be in relation to decision making, profit sharing, business ownership or the legal vs beneficial ownership of land.

This article considers land ownership and how, if not clearly documented, income tax planning and profit-sharing adjustments can lead to disputes over the ownership of the business, and assets used in the business.

Land ownership

Just because someone's name is on the title deed (the legal ownership) does not necessarily mean they are the beneficial owner. If the land has been included on the balance sheet of the farming partnership, then someone could argue that this is an indicator (amongst others) of the property belonging to the partnership.

It maybe that there is a field that is shown as partnership property but that an individual partner considers it to be in their personal ownership. The property, the field in this example, could be partnership property but the capital profit sharing ratio may be 100% to the individual partner meaning that if the field were ever sold the individual partner would be entitled to 100% of the proceeds from the sale.

The actual ownership is crucial when considering Wills and where assets are passed on death. A partnership agreement trumps a Will. Unfortunately, this can lead to assets not making their way to the intended recipient following the death of a partner. Everything is possible but it is important that ownership is clear in the partnership accounts, ideally included in a well-drafted partnership agreement, and everyone understands the ownership so Wills, the accounts, and the partnership agreement can correctly reflect the intentions.

Share of the partnership

The lack of clarity within partnerships is often not helped by the...