Last Updated on 4.8.22 by Michael Smoult
In any business, continuity is key.
So have you considered what would happen if you should suddenly lose the mental capacity to fulfil your role?
Depending on the type of business you own, this scenario could leave you, your staff and your business exposed.
From losing clients as service grinds to a halt, to a lengthy and costly process of family, friends or colleagues trying to gain control of your financial and business decision-making matters.
If mental incapacity should occur, a Property and Financial Affairs Lasting Power of Attorney (LPA) will allow an appointed person(s) or ‘attorney’ to manage decisions on your behalf.
Without an LPA in place, somebody, typically a family member or a colleague, would have to apply to the Court of Protection to obtain an Order of the Court. A Judge would then make a decision on who would be the appropriate party to manage your property and financial affairs. This can take months and cost thousands of pounds, in which time, your business could suffer beyond repair.
How no Power of Attorney will affect your business
Having an LPA in place as a Sole Trader is absolutely vital.
As a Sole Trader, your business will have no legal status separate from yourself (the owner). This essentially means the business lives and dies with you.
Without an LPA, your family will be unable to either maintain the business or properly close it down. The business will sit in limbo until a member of your family or friends can successfully gain control of your affairs (this can take up to 6 months through Court of Protection). Any rent, bills or payments the business owes will still be due during this time and, given they are personal debts of the sole trader, could potentially lead to bankruptcy.
If you are currently in business with a partner(s) operating as a genuine partnership. The resulting effects of mental incapacity will largely depend on whether or not you have a business partnership agreement in place (also known as a General Partnership Agreement or a Partnership Contract).
Again, like a sole trader, as you are not incorporated the business does not have a legal status separate from the owner(s).
A well-written partnership agreement should outline procedures in the unfortunate case of mental incapacitation or death.
If you do not have a partnership agreement in place, an LPA will enable your attorney to continue to operate the business with minimal break in continuity, also benefiting from your co-partner who will also carry on their day-to-day role.
Although if you do not have a partnership agreement or an LPA in place, your life partner will be unable to take control of your business affairs or make decisions on your behalf. Your assets will be allocated in accordance with your will and your business partner and/or family will have to go through the Court of Protection in order to get control of your property and finances.
Again, this period of inactivity could prove fatal for your business.
If you operate your business via a limited company then you will often have the dual roles of “director” and “shareholder” and what happens in the event of incapacity will largely depend on whether or not you have a shareholders’ agreement, a contract governing the relationship between the shareholders, or on what the Company’s Articles of Association (essentially the Company’s constitution) say.
An LPA works effectively in relation to shareholders where an attorney appointed under an LPA can deal with the shares held by you e.g. vote on those shares, transfer those shares (subject to any restrictions that apply), and receive dividends on your behalf.
However, when it comes to your role as a director the position is somewhat different as directors are not allowed as a matter of law to delegate their role, responsibility and statutory duties under a power of attorney. Instead, directors will either have to rely on fellow directors in situations where there are multiple directors or appoint an “alternate director”, someone who stands in your shoes as a director.
If you are the sole director you need to consider what would happen to the Company from a day-to-day operational perspective if something unexpected were to happen to you and whether you should have forms pre-signed appointing an alternate that can be used in specified situations (e.g. loss of capacity) or whether it is worth appointing a second director so there is always a degree of continuity if something were to happen unexpectedly to one of those directors.
What financial affairs can your attorney handle on your behalf?
An appointed Property and Financial Affairs LPA will have access to your financial information and will gain control of the following matters…
- Manage your property, including buying, selling and maintenance.
- Manage tax affairs, as well as benefits and savings
- Manage the opening and closing of your bank accounts
- Management of your investments and assets
When appointing an LPA with your business in mind, I recommend you appoint somebody that is familiar with the business. Also, and this may seem obvious, make sure you trust the person and that they are aware of the responsibilities. If operating via a limited company it is worth taking advice from a corporate solicitor to fully understand the implications and options available to you in the event of sudden incapacity and ensure there is a contingency plan in place to ensure the limited company can continue to operate on a day-to-day basis.
The importance of setting up a Lasting Power of Attorney is becoming an increasing priority for business owners. Our experienced team, who are experts on all aspects of the power of attorney matters, can help you at any stage of the process.