Farmers, agri-businesses and food entrepreneurs are highly encouraged to put the terms of an agreement in writing. Simple partnership agreements are also recommended for agreements to share ownership in one livestock animal, such as a bull, ram, boar, or show animal.
Partnership agreements serve several purposes. First, absent a partnership agreement, the New York “default rules” will apply. Second, when there is an oral agreement among partners, it is easy for a “misunderstanding” to arise on key issues. Memorializing a partnership agreement ensures that everyone is on the same page. Third, drafting a partnership agreement may bring up potential issues that the partners had not discussed. Not only is it legally prudent to put a partnership agreement in writing but it is also a helpful exercise forcing everyone to think about the “what if’s.”
Additionally, partnership agreements may salvage long-term relationships with people when a dispute arises. Unexpected things happen outside of the control of all parties that may create a disagreement (e.g., eminent domain or a major flood). The agriculture industry needs to have a change in mindset—putting agreements in writing does not indicate lack of trust, rather it’s just a sound business practice that everyone in the food and agriculture industry should engage in.
Some provisions that should be considered in the partnership agreement include the following:
1. Names and Addresses of the Partners. This section in the partnership agreement should include the names of any formal business organizations (e.g., Curt Rincker d/b/a Rincker Simmentals and Blackacre Ranch, LLC). If this is a limited partnership agreement, then the general and limited partners should be identified.
2. Name of the Partnership. A name of a partnership is always encouraged. Before deciding on a partnership name, make sure you are not infringing any trademarks. Run a quick Google and trademark search to see if anyone else is using that name. Any restrictions for use of the name for any other activities should be noted. For example, a farm family may decide to draft a formal partnership agreement under the name of Rincker Cattle Co. for raising seedstock agriculture but prohibit the use of the name for agri-tourism efforts (e.g., hay rides).
3. Purpose of the Partnership. It is important to include the purpose and scope of the partnership agreement and enumerate authorized business activities. For example, the purpose of the partnership may be to produce show pigs out of thirty designated sows while authorized business activities may include advertising and marketing.
4. Term of the Partnership. The term of the partnership should be narrowly defined. For example, will the partnership agreement last for certain number of years, until a certain stallion dies or is sold, or until one of the partners dies? The partnership could also end when one party is in default for a certain period of time (e.g., failure to pay maintenance or operating expenses for 90 days).
5. Initial Contribution From Each of the Partners. The partnership agreement should clearly define the amount of capital each partner should contribute initially and list instructions on how and when that payment should be delivered. The initial contribution could be in the form of cash, property or services.
6. Additional Contribution Requirement. After the initial contribution, any other required maintenance or required payments or services should be provided in the partnership agreement. The partnership agreement should also discuss any interest owed for outstanding payments or services promised, give directions for the timing and delivery of payment, and note any notice requirement for unanticipated expenses.
7. Assets of the Partnerships. Understandably, enumerating a complete list of partnership assets may be onerous for some large food and agriculture operations but it is important to itemize and accurately describe the assets of the partnership in the agreement itself. This not only assists in the valuation of a partner’s contribution but also mitigates future disputes during the winding up stage.
8. Liability of the Partnership. The agreement should include the liability that the other partners have to one another. For example, will partners indemnify each other for their own negligent acts that have harmed the partnership’s property and/or third parties?
9. Allocation of Profits and Losses. Unless agreed upon differently, under the “default rules” profits and losses will be shared evenly among the partners. If there is a salaried partner who does not share in losses, this should be specifically addressed in this section. Perhaps a partner who fronts all maintenance and marketing expenses on a show bull will want to keep 60% of the profits from semen sales and 100% of show winnings. Whatever the agreement is, allocation of profits and losses should be clearly memorialized to avoid a possible dispute.
10. Distribution of Profits. Distribution and allocation of profits are different concepts. Typically, some profits may go back into the partnership to help with operating expenses or growth. “Distribution” is identified as the actual payout of the profits. The agreement should memorialize procedures for making the distribution, ability to receive advance payments or draws from anticipated earnings, identification of person(s) that will declare the distributions, and timing of distributions. Furthermore, any limitation on distributions should be noted.
11. Duties of the Partners. The partnership agreement should not only specifically address the responsibilities of each partner but also prohibition of activities. For example, one partner may be in charge of the care and maintenance of a flush cow while the other partner makes all management decisions in regard to artificial insemination and marketing. Alternatively, one partner may be in charge of customer development, relations and marketing with a CSA while two other partners may be farmers charged with the day-to-day responsibility of growing and harvesting food.
12. Confidentiality. If a Non-Disclosure Agreement (“NDA”) was not entered into separately, confidentiality should be addressed in the partnership agreement. For example, Livestock Producer A might not want Livestock Producer B to disclose to third parties his/her feed rations, business relationships, or actual sale price of embryos made known through the partnership. Alternatively, a food entrepreneur may wish to keep his/her family recipes confidential. The partnership agreement may also prohibit all partners from discussing finances with third parties.
13. Salaries and Other Benefits of the Partners. Not only should the salaries be properly memorialized, but vacations, holidays, retirement, health insurance and other benefits should also be discussed in the partnership agreement. If a farmer goes on a family vacation for a week after the All East Livestock Exposition, is it okay for the neighbor kid to feed and care for the livestock owned by the partnership? Should one partner owe another partner any type of notice before such taking time off? These types of issues should be explicitly discussed and memorialized.
14. Expenses of Partnership. It is important to enumerate all the anticipated expenses of the partnership. To illustrate, perhaps an expensive show heifer was purchased by the partnership to be flushed for embryo transplants. Even though each partner initially contributed 50% of her sale price, there are other potential expenses in maintaining this female including feed, veterinary care, shelter, embryo flush expenses, semen, travel and advertising costs. Even though each partner may informally decide to pay 50% of all these expenses, these costs should be enumerated in the partnership agreement in case one partner later decides that he/she cannot afford his/her share of the fees.
15. Management of the Business. If a particular partnership is to be managed by less than all the partners, the agreement should identify the managing partners. For example, perhaps ten businessmen in Oklahoma decide they want to invest monies in the a pig operation based around Binghamton, New York but know very little about the industry. These businessman find Rockin’ R Livestock, Inc. to invest $200,000 pig operation. It would likely be appropriate for Rockin’ R Livestock, Inc. to be identified as the managing partner while the Oklahoma businessmen are the limited partners with little control over the management of the business.
16. Effect of a Default. The partnership agreement should discuss what would happen if one or more partners is in default after a certain period of time (e.g., 30 days, 60 days). If one partner fails to pay his/her half of the rent to a horse stable, will that partner then forfeit his right to make management decisions? Should the partner(s) give the defaulting partner some kind of notice and time to cure a default before management rights are affected? Is there a penalty?
17. Amendments to Partnership Agreement. For both long and short-term business ventures, it is unrealistic to think that partnership agreements will not need to be amended. Family operations grow, life has unexpected twists, and business plans change. The partnership agreement should allow for amendments to be made in writing agreed by a certain percentage of the votes from the partners.
18. Partner Changes. The partnership agreement should discuss the process for voting on any additional or substitute partners and any redistribution of assets in such an occurrence. The partnership agreement should include procedures for the removal of a partner and any limitations on a voluntarily withdraw of a partner. Buy-out prices should be noted in the partnership agreement in addition to the consequences of a partner’s death.
19. Assignability. The agreement should enumerate any limitations on the ability to sell his/her ownership interest to another. For example, the partnership agreement could give the other partner(s) first right of refusal or limit the pool of buyers in some way (e.g., restrict the sale to a competitor).
20. Alternative Dispute Resolution (“ADR”). Arbitration and mediation can be less costly and faster than the traditional court system. For example, the partnership agreement can have a mediation clause requiring the parties to participate in non-binding mediation with a qualified private agriculture mediator. If futile, then the partnership could still require binding arbitration.
21. Forum Selection. The partnership agreement may identify a particular court in which disputes must be tried. For example, it could state that disputes will be resolved in the New York Supreme Court of Orange County, a court mutually convenient for all partners.
22. Choice of Law. Partnership law is a state law issue. If a partnership is created among partners of more than one state then the agreement should identify whose state law applies to enforce the partnership agreement and “fill in the gaps” where the agreement is silent.
23. Attorneys’ Fees. Should a dispute arise between partners, it is recommended that the losing partner be obligated to pay the other partner(s) for reasonable attorneys’ fees. However, some people prefer not to award a partner for litigation and want each partner to take the financial risk of litigation.
24. Dissolution and Winding Up. The partnership agreement should enumerate facts and circumstances that may lead to the dissolution of the partnership (e.g., death of a partner, death/sale of livestock, withdrawal of a partner, insolvency) and procedures for winding up the business including distribution of assets.
On a final note, it is very important to tailor your partnership agreement to your particular needs. Although you can take partnership agreements off the Internet or Legal Zoom, it’s best to think through the legal issues for your situation with an agriculture lawyer.
When thinking through the pertinent issues for your partnership agreement, it may be useful to identify agreed upon attorneys, accountants, veterinarians, embryologists, chefs, financial institutions for partnership loans, feeding programs, herdsmen and hired help, food/agriculture shows or conferences to regularly participate in, magazines to place monthly ads in, approved photographers, approved sires for artificial insemination, payment of registration papers a breed association or membership to a food or agriculture organization, farmers’ markets that the partnership will participate in, or responsibility to develop an employee handbook and/or train employees in proper animal handling. Tweak your partnership agreement for each specific business venture.
When in doubt, err on the side of detail in your partnership agreement. Think through all the worst case scenarios and make sure the agreement covers these situations.
This is an excerpt from my book that I co-authored with Pat Dillon, an Iowa food and agriculture lawyer. You can purchase a copy of the book “Field Guide: Legal Guide for New York Farmers and Food Entrepreneurs” on Amazon.com.