A2O-UncasW Farming, Saturday, March 11,1989
F
A
R
MANAGEMENT
Drafting A Partnership
Agreement
By Alan Strock
Farm Management Agent for
Chester and Lancaster Counties
This time of year many farmers
are thinking about and planning for
future changes in the business
structure of their farm to reap all
possible tax benefits. We do this
with the use of rental, lease, joint
venture, family security, and but
sell agreements. We also use bene
fits from installment sales, gifting
programs, partnerships and corpo
rations. Some of the options avail
able are;
a. transfer of farm assets
b. earned income to
unearned income
c. simplify the operation
d. pool available resources
e. start building equity for the
next generation
f. provide more flexibility in
personal scheduling
g. limit the liability of certain
individuals
h. redefine management
responsibilities
i. provide a continuous supply
of labor and/or management
j. include non-farming indivi
duals in the profits and ownership
of the operation.
Let’s look at the partnership
agreement It is important to put
the agreement in writing because
there are many situations which
may arise. Putting the agreement
in writing can eliminate future dis
agreements and arguments that
may destroy the partnership as
well as the personal relationship.
The partnership agreement may
be divided into the following eight
sections:
1. Introduction
2. Contributions
3. Labor, management and
vacations
4. Distribution of profits
5. Financial records
6. Partners Limits
7. Dissolution or termination
8. Miscellaneous.
Certain topics should be
addressed in each section.
Introduction
This section should include the
partnership name and address,
name and address of the individu
als involved, type of business, term
of the partnership, and location of
the partnership. Usually this is
short and states the basics of the
agreement.
Contributions
This section should detail the
specific land, buildings, trees,
machinery, livestock, supplies,
feedstuffs, and/or cash contribu
tions of each'partner initially to the
partnership. It should also discuss
the recording procedures for tax
and fair market capital accounts
for each partner and how they
relate to ownership of the partner
ship. It may also refer you to other
rental or lease agreements.
This section should also state
that all assets purchasedor grown
by the partnership after the part
nership’s formation will be consid
ered partneohip assets.'*
Labor, management and vaca
tions
This section is critically impor
tant. Labor and management con
HDOMLUSESIHESAME BASIC PMNCI
The best defense against tobacco disease is Ride
Just one application (at labeled rates) in the field
before transplanting controls blue mold, black shank and
Pythium all season long.
How? First, Ridomil stops disease on contact in
the soil. Then its systemic action allows it to be absorbed ini
the plant through the roots. absorbed%to the plant through the ;
Once in the plant, it keeps the entte plant safe from disease
tributions and responsibilities
should be' spelled out explicitly
unless they will be equal in all
ways.
Almost always the business will
operate more smoothly if one part
ner is acknowledged as the prim
ary decision maker in a specified
area. It should state which man
agement decisions will be made
strictly by joint agreement. This
section should also state whether
each partner will devote their undi
vided time and attention to the bus
iness and if side line businesses of
any type will be allowed.
The time off and vacation limits
should be stated in this section. Be
sure to allow for vacations as this
can be a major reason to form a
partnership.
Distribution of profits
This section should be very
detailed. The term “net profit**
should be defined. Detail how Uk.
profits will be distributed which
include the exact amounts of
monthly draws for each partner.
You may consider the use of a
guaranteed draw for a younger
partner who will be putting more
time and energy into the business
than the senior partner. Using the
guaranteed draw will give the
junior partner more money to sur
vive on, but yet not decrease his
ownership of the business. This
guaranted draw will be a tax
deduction, just like any wage for
the operating partnership.
The effect of a substantial
increase or decrease in farm profits
on partners’ draws should be dis
cussed as well as the effect of a
prolonged vacation, pursuit of
other interests, illness or disability.
It is critically important that you
spell out the payment for services
of the spouses and children here,
especially if the contributions are
not nearly equal. The relationship
of spouses to each other can often
make or break the partnership.
Financial records
The financial records are the
lifeblood of the partnership and
need serious attention. The follow,
ing are important points to address;
•Who will post the records, fife
the invoices, and see that the taxes
are filled?
•What bank will the partnership
use?
•Who can sign partnership
checks?
•What is the maximum any one
partner can spend without the other
partners consent?
•What, if any, personal
expenses (taxes, fuel, vehicle
repairs, utilities, etc.) will the part
nership pay.
•Will the partnership operate on
a fiscal or calendar year tax basis?
•How often will the partners
meet to review the financial
records of the partnership?
•How soon after the end of the
business year must the
books be finalized and reviewed
by all parties?
Partners’ Limits
Limits should be set on the
amount that an individual partner
1 w