As a result of Covid-19 outbreak, 2020 has been extremely difficult for many businesses and have left many considering whether they have adequate protection in place to protect their business in the future.
It is, of course, important to put a Will in place to ensure your business can function should the worst happen. However, have you considered what will happen with your business during your lifetime if you are unable to look after it yourself?
What is a Lasting Power of Attorney?
A Lasting Power of Attorney (LPA) is a document which allows you to appoint someone (an attorney) to make decisions on your behalf. There are two different types of LPAs: for property & financial affairs and for health & welfare. The LPA for property & financial affairs can deal with the financial aspects of your business.
Why do I need an LPA as a business owner?
As a business owner, if you lose capacity (due to an illness or an accident), the bank will freeze your business accounts and contracts entered into could become invalid. This can cause a number of serious difficulties for the business and may result in contractors not being paid and employees not receiving their wages for a long period of time.
By putting a business LPA in place, you can ensure that your business can continue operating by appointing an attorney (or attorneys) who can act on your behalf. You can grant your attorney specific powers in relation to the business and it is vital to choose a person who you trust and who understands how the business operates.
What about keeping my personal affairs separate?
You can make two separate LPAs for property & financial affairs – one dealing with your personal affairs (personal bank accounts, property, pensions etc), and one for the purposes of your business only.
It is advisable to consider if different attorneys under the two separate documents should be appointed to avoid a potential conflict of interest. Most importantly, there may be someone other than a family member who understands your business and who will be better placed as your attorney under the business LPA.
I am a sole trader/I am in a partnership/I have a limited company
There are various matters to consider depending on how you own your business:
Sole trader. As a sole trader you dictate how to manage your own businesses during your lifetime. It is, therefore, important to make an LPA to ensure that someone is able to take over your business if you become incapacitated.
There may be no need for you to have a separate business LPA, provided you are happy for your chosen attorney to deal with your personal financial affairs and the running of your business. If you are not, then you should consider making a separate LPA for the business.
Partnership. If you are in a partnership, a partnership agreement should deal with incapacity and its consequences. If the agreement does not provide for the loss of a partner’s capacity (e.g., it may stipulate the partner who is incapacitated must retire), then The Partnership Act 1890 will govern the partnership. Under this Act, the partnership can be dissolved by applying to court, which can be costly and time consuming.
It is useful to have an LPA in place dealing with your interest in the partnership (especially if the partnership agreement does not deal with incapacity). You should carefully consider who to appoint as an attorney, as if the appointed attorney and your business partner are the same person, there is a risk that the terms of the partnership could be altered in the continuing partner’s favour.
Limited company. The company documents (articles of association and the shareholders’ agreement) should deal with what happens on incapacity.
However, a shareholder may appoint an attorney to exercise their voting rights on their behalf, so that the business can continue running as normal.
What will happen if I don’t have an LPA?
If you do not have an LPA and you lose the ability to make your own decisions, an application would have to be made to the court for a deputy to be appointed. Deputyship applications are very time consuming, expensive and complicated. As a result, until the deputy is appointed (which can take six months or longer), there is risk that no one would be able to make decisions regarding your business affairs.
It is important to seek expect legal advice when putting a business LPA in place, to ensure the business structure is considered properly, so that your business can continue to operate smoothly. For more information contact Kat King on 01749 341805 or email kat.king@mogersdrewett.com
