With the financial pressure on many farm businesses, diversification into new enterprises and business ventures remains essential to ensure not only the prosperity of the farm but also the survival of many rural communities.

When anyone commits to a new venture, they tend to primarily consider grant aid, profitability, cash flow and banking. While I am not suggesting any business should ignore these key factors, how you decide to trade should also be taken into consideration. There are three main considerations that every client should think about before deciding what to use: ownership, liability and tax.

Ownership

If you intend to own the business 100% now and in the future, trading in your own name as a sole trader is your first option and the simplest.

If you are in business with your spouse and/or close family members whose financial interests are closely aligned, then trading through a partnership is a possibility. But if you wish to enter into business with other people beyond this, a limited liability vehicle is usually best because you limit the extent to which you are connected to your ‘business partners’, to the shares you own in the limited company or the interest in the Limited Liability Partnership (LLP).

Liability

It is often quoted that around 20% of new businesses fail in the first year and a further 50% within four years. Even if we assume that some were not adequately funded, had a flawed business model or were poorly managed, it still leaves a significant number that fail through no fault of their own.

The correct business structure can determine whether you are able to start again immediately or become bankrupt. Trading in your own name or as a partnership means that you are either fully liable or jointly and severally liable for the debt. Or, to put it another way, if your business fails and has £60,000 of creditors, they have the right to come after you personally.

Although the limited recourse to owners makes LLPs and companies an attractive option, it should be noted that, in certain circumstances, this protection may be put to one side.

Tax

Tax is usually a significant factor in determining the preferred option.

In the case of both sole traders and partnerships, you are taxed on 100% of the profits whether or not you take them out of the business. This means that you can be taxed by as much as 50% on profits even if you reinvest it into the business. This is clearly not a tax efficient strategy.

As a company is a separate legal entity, it will pay corporation tax (which will be either 20% or 23%, depending on the level of profit that you make).

You, as the owner, are only taxed on what you take out of the business. Therefore, if you reinvest profits in the business, this may be a more tax efficient route.

As can be seen from the above, it is not simply a matter of saying one is better than the other as there are a number of factors requiring careful consideration before determining the best way forward. It is always best to take appropriate professional advice.

*Richard Gray is a chartered accountant, licensed insolvency practitioner and an owner of PGR chartered accountants. He can be contacted on 02890788856, or email richard@pgaccountants.com