Partnerships: clear and current governance

Businesses are driven by the people involved. People rely on relationships, and commercial relationships need certainty, trust and risk management, particularly in the current economic environment. All of these issues are key when considering the structure of a partnership for a business, and how to document that structure. 

Private structures

For family farming businesses in particular, a partnership can provide a straightforward vehicle to carry on the business, allowing a separate legal entity to trade and contract with third parties. The partnership is private and its constitution is not, for example, available to access via a public register, meaning that the internal functioning can remain a private matter for the partners. 

Key considerations

Fundamentally, the partnership is a contract among the partners, so it is for the partners to agree how their business should function. Management provisions could be simple majority decision, or a sophisticated decision-making and control structure equivalent to a complex corporate entity. 

The partnership documentation should clearly set out the rights and responsibilities of the partners, as well as the treatment of assets of the business. Land interests held by the partners are likely to be the single most valuable asset of the business, and so the partners should consider how that asset is held, and what value it is attributed if a partner retires or dies. The risk of dispute in relation to significant capital interests of the business means that the Partnership Agreement should be clear on the asset treatment and ownership, as well as profits deriving from that asset. 

From a succession perspective, the treatment of land held by Scottish partnerships should be considered in the context of the partners’ own succession arrangements, but also with the overall business objectives in mind. 

Clarity of documentation is important not only for the partners themselves, but for third parties engaging with the business – e.g. a lender. Third parties require to manage their risk, and the Partnership Agreement should provide certainty on key events which impact on the partnership business and its continuity – e.g. death or retirement. This is particularly the case where third parties are likely to remain engaged with the business even in the event of the death or retirement of a partner. 

Review and update

Partnerships are flexible trading vehicles for a farming business, which can be structured to suit the scale of the enterprise and the individual partners involved. Like any commercial venture, it is important that the constitution and governance documents are up to date and provide a clear framework to allow third parties to engage with the business, but allowing the structure to adapt to the changing needs of the business over time. Commercially, in a changing economic environment, it is sensible to keep the business structure and its governance documents under review. 

Graeme Gass

Turcan Connell

graeme.gass@turcanconnell.com