5 Things to Consider Before You Form: Ag General Partnership

Planning for the future frequently involves a discussion about the use of farm entities to prepare for transitioning operations to the next generation.  Methods of succession planning and business structuring must be uniquely fitted to each unique case.  The wrong choice can be a costly mistake, both from a tax and legal perspective and a practical operations perspective.  With the myriad possibilities, it is important to understand the benefits and detriments of these options and how they would impact your farm operation.

You might have one and not know it.  

The hallmark of a general partnership is that it can be formed, in part, based upon the actions of the people involved.  For example, a common definition of partnership includes the phrase “association of two or more persons to carry on as co-owners a business for profit”.  Essentially, this means the actions of the parties involved can establish a partnership—no written agreement is required.  Are you sharing equipment? Are you sharing net income?  Are you sharing work duties (planting, tilling, harvesting) for the common goal?  You might have a general partnership and not know it.  If you consider a general partnership, consider a formal legal partnership, complete with a partnership agreement.  Having guidance can help all involved to understand how the business should operate, and how disputes should be resolved.

What about my property? 

Be careful to distinguish ownership.  Partnership property is owned by the Partnership.  Partners may also simply contribute use of property to the partnership.  If you have an operating loan at the local bank that is secured by equipment or non-titled property, be certain you and the bank both understand what property is owned individually versus owned by the Partnership.

The Partnership Protects Me Against Creditors, Right?

Probably not.  In many case, debts of the partnership may be deemed debts of the general partners.

 I Can Just Give the Partnership to My Child, Right?

Partnerships, formal and informal, should be reviewed by an attorney, especially if you want the business assets to pass in a specific manner to your children or business partners after you pass away or are no longer able to work.  Tax consequences from gifting partnership interests, real estate or equipment during life should be carefully analyzed by an attorney before a decision is made.