12 March 1999

Keep hold of your assets

By Suzie Horne

MANY farmers stand to lose much more than they realise if their business fails. While sole traders and partners are particularly vulnerable, companies also need handling with care.

Whatever the trading structure of the business, farming risks need to be regularly reviewed to avoid unpleasant surprises, warns Michael Womack of Cambridge solicitor Taylor Vinters.

Creditors most likely to force a business into receivership are the Inland Revenue and Customs and Excise, Mr Womack told the recent Agrilaw seminar at Linton, Cambs.

"You need to be clear which assets are exposed to which creditors, who can sue you and who has authority to deal or to commit the business. In a partnership, all partners can commit the entity to third parties even though the partners have agreed between themselves that they have limited authority."

All assets, not just those use in the business, are at risk in sole trader and partnership structures. However, these businesses do benefit from accounting simplicity and the free transfer of cash between personal and business accounts.

Partnership agreements should make provision for resolving disp-utes and dissolving the partnership.

Company law also gives relative freedom of contract in the form of shareholders agreements, but the exercise is often much more complicated.

In farming families, land is commonly farmed by one or more company directors, but is often in fragmented ownership within the extended family. It is also often let by the non-farming owners to active farming members of the family. The longer such arrangements run, the greater the potential for problems, says Mr Womack.

Increasingly non-farming members want to realise the true value of their land but are unable to do so, he says. A shareholders agreement can provide for a fair outcome.

The company is a separate legal entity from its directors and shareholders. "If the company is carrying on the farming business, neither the individual shareholders nor the directors are personally liable to the companys creditors. This is the general rule."

But particular attention is needed if the company is getting into financial trouble. "Directors who carry on regardless may saddle themselves with personal liability," warns Mr Womack.

"A company will never be a complete umbrella, but you can keep the land outside and thus free from creditor claims on the business. There are strong capital gains tax reasons to keep land and any other asset that is likely to show a capital gain outside the company."

But operating under a corporate structure brings more stringent and costly accounting practice requirements. And directors are employees, so their salaries are subject to PAYE and National Insurance. &#42