Business Lasting Powers of Attorney: What if you lost the ability to run your business?

Most people are now familiar with Lasting Powers of Attorney (LPA) for their health and personal affairs, but it is as important to consider what would happen if you could not run your business due to loss of capacity.  You may have already considered this and have an informal arrangement in place, but legally this will not be sufficient.

What is a Business Lasting Power of Attorney?

Unlike a General Power of Attorney which ends when the donor loses mental capacity, a Lasting Power of Attorney (LPA) is a legal document which continues beyond the loss of capacity avoiding disruption to the business and its operations.

A Business LPA enables a business owner to delegate powers to one or more nominated attorneys. The nominated attorneys will be able to step in and make decisions about the day-to-day running of the business in the event that the business owner becomes incapacitated due to an accident or illness. This type of LPA specifically addresses the needs and operations of a business, enabling the nominated attorney(s) to authorise payments to employees, suppliers and creditors, organise insurance, enter into contracts, buy and sell property, manage investments, and deal with the tax affairs of the business.

Why do I need a separate Business Lasting Power of Attorney?

It is possible to have a single Property and Financial Affairs LPA as there are no practical differences between a business and personal financial affairs LPA. However, in many instances it will not be appropriate for the same person to make personal and business decisions on your behalf, and it could potentially create a conflict of interest.  Furthermore, having one LPA splitting powers for business and personal use could create confusion regarding the scope of the attorney’s authority, which could potentially result in the Office of the Public Guardian rejecting the LPA. It is therefore recommended that a Business LPA is separate, ensuring that the individuals nominated to look after your business affairs have the relevant skills, knowledge and expertise to run and protect your business, and that they are clear about the extent of their authority.

Why is a Business Lasting Power of Attorney important?

• Continuity and Stability: If a business owner suddenly loses the capacity to make decisions, it can create uncertainty and disruption. A Business LPA ensures that there is a trusted person in place to manage the business, maintaining stability and continuity.
• Skills and knowledge: Business LPAs allow for the appointment of one or more attorneys with the necessary skills and knowledge to make informed decisions, ensuring that the business is in capable hands.
• Scope of authority: A Business LPA can be tailored to the specific needs of the business and clearly define the scope of the attorney’s authority. This can include day-to-day management, financial decisions, contractual matters, and strategic planning.
• Restrictions and Guidelines: A Business LPA can outline restrictions on the attorney’s powers and provide guidance on how business decisions should be made, and how the business should be run.

Is a Business Lasting Power of Attorney appropriate for my business?

It is important to consider the structure and nature of a business and to understand the powers which can be delegated under the business’s governing documents.

Sole Trader

If you are a sole trader, it is likely that your business assets are held in your sole name and controlled by you. Legally your business does not have a separate legal personality, meaning that you are essentially the business. Consequently, any loss of capacity is likely to mean your business is no longer able to trade and expose it to risk. Appointing an attorney under a Business LPA is therefore essential to ensure the continuity of your business.

Partnerships

Partners should consult their partnership agreement as they may contain provisions stating what will happen if a partner becomes incapacitated. It is possible for a Business LPA to run alongside a partnership agreement, but it is important that it doesn’t conflict with the provisions in the partnership agreement or with relevant legislation governing partnerships. It is advisable to review and seek professional legal advice on the exact terms of your partnership agreement to ensure that your business interests are protected.

Directors

Generally, the office of director is personal, and the performance of any functions cannot be delegated to another person by way of a power of attorney.  The company’s articles of association and/or shareholders agreement will govern what will happen if a director loses mental capacity. They often will provide that if a company director becomes physically or mentally incapable of acting as a director they may be removed from office. It is important to review your company’s articles of association so that you are familiar with the provisions relating to the removal of a director who has lost capacity. You may also wish to consider amending your articles to ensure that there is a clear process in place.

For sole directors and sole or majority shareholders, business continuity may be drastically impacted if they become mentally incapacitated.  A solution is to put in place a Business LPA covering the management of the business, including the exercising of shareholder rights to ensure resolutions are capable of being passed.

What could happen if I don’t have a Business Lasting Power of Attorney?

If you do not have a valid Business LPA in place and lose mental capacity, then an application may need to be made to the Court of Protection seeking the appointment of a deputy to run the business on your behalf.  Applications to the Court of Protection take on average six to seven months which could cause considerable disruption to your business, and your business bank accounts may be frozen until a deputy is appointed.  The process can also be expensive, and there is also no guarantee that the deputy appointed by the Court of Protection would have been someone that you would have chosen.

Conclusion

Unexpected absences or incapacity has the potential to disrupt the operation of your business. A Business LPA should be considered an essential tool for managing your business interests and minimising risk. A comprehensive review of your company’s governing documents is also a key part of contingency planning. Given the complexities involved, it is advisable to seek legal advice to ensure that the Business LPA is properly drafted and suits the specific needs of your business.

For more information, please contact our Private Client team on 01708 511 000.