Managing risk

Historically the majority of farming businesses have operated as sole traders or by using partnerships. This is simple but provides unlimited liability.

Your personal assets, such as your private residence and savings, could be at risk to settle debts of the business.

Unlike a sole trader or partnership, a limited company is a separate legal entity. It is therefore the company that is liable for the debts, losses, and any claims made against the business.

If for any reason the company is unable to pay its debts, then the money that shareholders stand to lose is ‘limited’ to their original investment – so, the amount paid for their shares.

Unless directors have provided personal guarantees, any property held outside the company is protected. *

*The one major exception to this is in cases of fraud, where the personal liability of directors is unlimited.

An LLP is a hybrid of a limited company and a partnership. While it is taxed similarly to a partnership, an LLP also provides limited liability.

With an LLP, the partners’ liability is limited to their OWN investment, unlike a normal partnership where the partners are jointly and severally liable for ALL the partners’ debts.

There may be circumstances where one company is not enough.

Where property and assets are held in a company and the business is subject to higher risk, either due to the nature of the business or through diversification into more high-risk activities such as wedding venues or food production, then those assets would be exposed to any claim.

Using a separate company from the main trading company to hold the property and assets could limit this risk by protecting the property.

The choice of structure for any business is an important one. There is no ‘one size fits all’ approach and the structure will depend on a variety of factors, such as the nature and size of the business, the profits generated and the respective tax implications.

It should also be remembered that circumstances change, and so the choice of business vehicle should be continually revisited.