As a business owner, it is important to consider what would happen if you were unable to make decisions and how this would affect the running of the business.
Common scenarios where this may be relevant include, for example:
- if you were abroad on holiday or for business
- if you were to have an accident or sustained a serious injury
- if you developed a medical condition that incapacitated you, or which required treatment that incapacitated you either mentally or physically – even if only temporarily.
In such circumstances, who would authorise the payment of bills, sign cheques, service a business loan, renew insurance policies, or pay salaries? Even if you have had the foresight to purchase Key Person Insurance, this will not help you with the practicalities of running your business if you are ill or injured and unable to work or to make decisions.
It would be wrong to assume that a family member or a business colleague would gain the authority to make decisions on your behalf – this assumption could leave your business exposed.
Without adequate protection, it is likely that someone would have to make an application to the Court of Protection for the appointment of a “deputy” to act on your behalf, if you become incapable of working or of making decisions.
This process is very time-consuming and expensive, on top of which there is no guarantee that the person the Court of Protection chooses as your deputy will be the same person you would have chosen had you been able to do so yourself.
It can take six months or more before a deputy is appointed, during which time your business is likely to be vulnerable and at risk. Only a deputy can access your business’s finances, so commercially everything to do with running your business would be held up.
Two pieces of legislation, the Mental Health (Discrimination) Act 2013 and the Equality Act 2010, have raised serious issues which could affect many businesses. This is because the legislation abolished a mechanism in law whereby directors and partners could be removed from a business on the grounds of mental incapacity alone.
The legislation allows any director or partner who is removed purely on the grounds of mental incapacity to bring a claim against the business for discrimination, because both mental and physical incapacity are “protected characteristics” within the Equality Act provisions.
A deputyship order from the Court of Protection is now the only lawful way to remove a business director or partner on the basis of mental incapacity.
If a bank discovers that a partner, director or sole trader lacks mental capacity, there is a risk that they will call in any loan, withdraw any overdraft facility or, in the worst case, freeze the business accounts entirely, in order to protect their money.
You could also have a situation where a mentally incapable director or partner is entering into contracts which are enforceable against the business.
If you are a sole trader, then the risk is perhaps more obvious, as there is unlikely to be anyone else who has the necessary authority to access the bank accounts or other assets of the business.
If you are in a partnership, then perhaps you own assets in your personal name outside that of the partnership, such as premises which are leased to the partnership. Without protection, no one would have the authority to deal with this or to access your capital account on your behalf. This in turn could seriously affect the partnership business as well as your family.
If you are a director of a company, then the company’s Articles of Association usually govern what happens if a director loses mental capacity. However, some of these clauses may now be seen as discriminatory, as mentioned above.
If you are a shareholder as well as a director, then you need to have authorised someone else of your choosing to be able to exercise your voting rights. This is vitally important if you are the majority shareholder, as it would prove a real hindrance to the continuity of the business if you have nothing in place if you were to lose mental capacity.
A simple mis-step, a car accident, a serious illness or a stroke could paralyse or kill off your business, leaving it unable to pay wages, tax, or creditors and destroying its hard-won reputation.
To protect your interests and those of your business, and to avoid disruption, you should consider making a business Lasting Power of Attorney. This should form an essential part of your business’s continuity plan and management strategy.
What is a lasting power of attorney?
A lasting power of attorney (LPA) is a legal document through which you authorise a chosen person (an attorney) to make certain decisions on your behalf.
Perhaps you feel that an LPA is not necessary, and assume that family members can step in when necessary to make decisions. But this is not the case; family members do not have the automatic right to make decisions on your behalf.
But LPAs are not just limited to someone losing mental capacity. For business owners who travel as part of their business, having a business LPA can enable an authorised person to ensure the continuity of the business while the business owner is away.
You need to think carefully about who should be appointed as your business attorney, particularly when the power in your business is finely balanced. You may prefer to appoint someone who shares the same views as you about your business.
It may also be important to make two LPAs – one for your personal property and financial affairs, and one for your business. If you appoint your spouse or partner (in the personal sense) or a family member to look after your personal affairs on your behalf, you may not necessarily want them around the boardroom table with your business partners or fellow directors trying to make commercial decisions for your business.
What is right for you as a business owner very much depends on the structure of your business:
If you are a sole trader, your business is not likely to have a separate legal entity from you. This means that appointing an attorney under a business LPA will be an effective way for you to make provision for the continuity of your business, in the event that you are incapacitated.
If you are a partner in a partnership that has several partners, you will need to check the terms of the partnership agreement. Some partnership agreements may include provision for what would happen should one of the partners become incapacitated. You should seek advice on the wording of the LPA to ensure that it does not conflict with any provisions already made in the partnership agreement.
If you are a director of a company, you will need to check the company’s Articles of Association and any Shareholders Agreement. They may need amending to remove any discriminatory clauses, and you will need to have a business LPA in place which can work in conjunction with your business documents to ensure the smooth running of your business.
Business LPAs are a very straightforward means of protecting your business, not only for yourself but also for your fellow business owners, shareholders and employees. Best of all, the cost of making them is tax deductible!
To obtain specialist advice on protecting your business, come along to meet Jane or one of her colleagues in the Private Client Department at our offices in Queens Road, Reading, Berkshire