For UK farmers, structuring the ownership and operation of a farm is one of the most important legal and commercial decisions they will make. Whether managing a multi-generational family enterprise, expanding operations, or preparing for succession, the legal framework adopted will have a lasting impact on taxation, liability, governance, and the long-term sustainability of the business. In today’s increasingly complex agricultural and regulatory landscape, choosing between a limited liability partnership and a company structure is not just an administrative exercise, it is a strategic decision that requires careful planning and expert advice.*
At arch.law, we regularly advise farmers, landowners and rural businesses across the UK and internationally on how best to structure their operations. In this article, I’ll explore the key considerations involved in deciding whether a farm should be held within a limited liability partnership or a company, with a particular focus on the practical realities faced by modern farming businesses.
What is a Limited Liability Partnership (LLP) for Farming Businesses?
A limited liability partnership, commonly referred to as an LLP, is a hybrid structure that combines elements of a traditional partnership with the benefit of limited liability. It is a separate legal entity, capable of owning property and entering into contracts in its own name, but it is generally taxed in a similar way to a partnership. Members of an LLP share in the profits of the business and have flexibility in determining how those profits are allocated between them. In contrast, a company is also a separate legal entity, but it operates under a more formal corporate framework, with shareholders and directors, and is subject to corporation tax rather than income tax on its profits.
Tax Efficiency: LLP vs Company for UK Farmers
One of the most significant considerations for farmers when choosing between these structures is tax efficiency. In an LLP, profits are treated as income in the hands of the individual members. This means that members are subject to income tax at their marginal rates, which can be as high as 45 percent, together with National Insurance contributions. However, this treatment can be advantageous in certain circumstances, particularly where profits are modest or where losses are anticipated, as those losses may be available to offset against other personal income, subject to applicable rules. The flexibility in allocating profits between members can also be useful for family farming businesses, enabling income to be distributed in a tax-efficient manner.
A company, by contrast, pays corporation tax on its profits, which is generally lower than the higher rates of income tax. This can make the company structure attractive for profitable farming operations, particularly where profits are to be retained within the business for reinvestment. However, the position becomes more complex when profits are extracted from the company, whether by way of salary, dividends or other means. Each method of extraction carries its own tax implications, and careful planning is required to ensure overall efficiency. In addition, operating through a company may involve higher administrative and compliance costs, which should not be overlooked.
Liability and Risk Management in Farming Enterprises
Liability is another key factor that weighs heavily in favour of both LLPs and companies when compared with traditional partnerships. Farming is an inherently risky business, with exposure to environmental liabilities, contractual disputes, employee claims and potential accidents. An LLP offers its members limited liability, meaning that, in general terms, their personal assets are protected from the debts and obligations of the business. This represents a significant advantage over traditional partnerships and is one of the main reasons why LLPs have become increasingly popular in the agricultural sector.
A company similarly provides limited liability protection to its shareholders, with liability generally limited to the amount invested in the company. In practice, however, lenders may still require personal guarantees from directors or shareholders, particularly in the context of borrowing or financing arrangements. Nevertheless, the existence of a separate legal entity can provide an important layer of protection and risk management, particularly for larger or more diversified farming operations.
Succession Planning Through Shares in a Farming Company
Succession planning is often at the forefront of farmers’ minds, particularly in the UK where farms are frequently passed down through generations. An LLP can provide a flexible framework for succession, allowing new members to be introduced gradually over time. For example, children can be brought into the business as members, with profit shares adjusted to reflect their level of involvement and contribution. This can facilitate a smooth transition of both income and responsibility, while allowing the older generation to retain a degree of control during the handover period.
A company structure also offers opportunities for structured succession planning, particularly through the transfer of shares. Shares can be gifted or sold over time, and different classes of shares can be created to separate voting rights from economic interests. This can be particularly useful in managing family dynamics and ensuring that control of the business is retained by those actively involved in its operation. However, care must be taken to ensure that any restructuring or transfer of shares does not inadvertently jeopardise valuable tax reliefs, such as Agricultural Property Relief and Business Property Relief, which are often central to effective estate planning in the farming context.
How Should Agricultural Land Be Owned or Held?
The question of how land and other key assets are held is another crucial consideration. In many farming businesses, land is held personally by individuals or within family trusts, while the operational business is carried on through an LLP. This separation can provide significant flexibility for estate planning and can help to protect valuable assets from trading risks. An LLP, as a separate legal entity, can also hold land in its own name, although the tax and practical implications of doing so must be carefully assessed.
In a company structure, land may either be owned by the company or retained in personal ownership and leased to the company. Each approach has its own advantages and disadvantages. Holding land within a company can simplify the operational structure, but transferring land into a company can trigger tax liabilities, including capital gains tax and stamp duty land tax, which may be substantial. Retaining land outside the company and leasing it to the business can provide an income stream to individuals and may offer greater flexibility, but it requires careful documentation to ensure that the arrangements are robust and commercially sound.
Governance and Control: Flexibility vs Formality
Governance and decision-making processes also differ between LLPs and companies. An LLP generally offers greater flexibility and informality, with the relationship between members governed primarily by the LLP agreement. This allows members to tailor the structure to their specific needs, setting out how decisions are made, how profits are shared and what happens in the event of retirement, death or dispute. However, this flexibility also places a premium on having a well-drafted agreement in place, as the absence of clear provisions can lead to uncertainty and conflict.
A company, on the other hand, operates within a more formal governance framework, with statutory duties imposed on directors and specific requirements for record-keeping and filing. While this introduces an additional administrative burden, it can also provide clarity and discipline, particularly in larger or more complex farming businesses. The existence of defined roles and responsibilities can help to avoid misunderstandings and ensure that decisions are made in a structured and transparent manner.
Access to Finance and Investment for Farming Businesses
Access to finance and investment is another area where the choice of structure can have a material impact. An LLP is often reliant on the financial standing of its members, and lenders may look to the personal assets of members when assessing risk. Bringing in external investors can be more challenging, as there is no share capital in the same way as a company, and the admission of new members requires careful negotiation and documentation.
A company structure is generally more familiar to investors and lenders, and it can provide greater flexibility in raising capital. Shares can be issued to new investors, and different classes of shares can be used to tailor economic and voting rights. This can be particularly relevant for farms looking to diversify into new areas, undertake significant capital projects or enter into joint ventures with third parties. The corporate structure can, in these circumstances, provide a more accessible and scalable platform for growth.
Exit Strategies and Long-Term Planning
When considering long-term strategy, it is also important to think about exit options. In an LLP, the exit of a member is governed by the LLP agreement, and the valuation and transfer of a member’s interest can be complex. Without clear provisions, disputes can arise, particularly in family contexts where expectations may differ. A company, by contrast, allows for the transfer or sale of shares, often without disrupting the underlying business. This can make it easier to bring in new participants or facilitate a clean exit, whether by way of sale, retirement or succession.
In practice, many farming businesses adopt hybrid structures that seek to combine the advantages of both LLPs and companies. For example, it is not uncommon for land to be held personally or within a trust, with the farming operations carried out through an LLP, and a company used for specific activities such as diversification projects or machinery ownership. These structures can offer a high degree of flexibility and tax efficiency, but they also introduce additional complexity and require careful coordination to ensure that all elements work together effectively.
Ultimately, there is no single correct answer to the question of whether a farm should be held in an LLP or a company structure. The right approach will depend on a range of factors, including the size and profitability of the business, the level of risk involved, the family dynamics at play and the long-term objectives of those involved. What is clear, however, is that the decision should not be taken lightly, and that early, proactive advice can make a significant difference to the outcome.
At arch.law, we take a holistic approach to advising farming clients, recognising that legal, tax and commercial considerations are closely intertwined. Our experience across corporate and commercial law, estate planning and real estate enables us to provide joined-up advice that reflects the realities of modern farming businesses. With a global presence and a deep understanding of the agricultural sector, we are well placed to support clients in structuring their affairs in a way that protects their assets, supports growth and secures their legacy for future generations.
Get in touch
If you are reviewing your current structure or considering a change, please do get in touch at joe.burns@arch.law for friendly advice from our team.
*arch.law does not provide tax advice and once your structure is established, tax advice should be sought independently.
