A lasting power of attorney (LPA) is a legal document which gives another person of your choice the ability to make decisions on your behalf.
An LPA is not only for personal assets – it may also be in the best interest of a business owner to protect themselves in the same way. Without a LPA in place, your business could face significant problems if you become incapable. An LPA should be regarded as an essential part of risk management to avoid a possible future crisis. Just look how smug the guy is in the photo above, all because he’s got his affairs in order.
Many people assume that Powers of Attorneys are used where someone lacks mental capacity, and while that is true, in business I’ve seen them needed in times of physical incapacity. Take for instance signing legal documents, bank mandates, new finance, etc – all need a signature, but if you’re physically incapable of signing (say due to a horrific car accident) then the business will be at a potential standstill until you’re able to sign or you get the Court of Protection to appoint an attorney for you.
Let’s explore how a business owner’s power of attorney might work.
The very first thing to consider is the type of business entity through which you operate.
Partnerships
If you are a partner, the partnership agreement should be looked at.
This may provide for compulsory retirement from the partnership in the event of incapacity, although some commentators argue that such provisions are in breach of the Equality Act 2010. If there is no partnership agreement, the Partnership Act 1890 provides that the courts can dissolve the partnership if a partner becomes incapable. If neither of these apply, a solicitor appointed under a finance LPA would be able to act on your behalf.
Don’t have an LPA in place? Then you may not be able to properly make decisions or, if you can, you may not be able to sign off documents.
Sole traders
If you are a sole trader, you will have no partners nor co-directors who can carry on your role.
It is therefore vital that a sole trader draws up an LPA. This means that in the event of incapacity, someone both trusted and competent can run the business, pay its bills, and control the business bank account. If no provision is made, the future of the business could be threatened due to an inability to operate, and staff and suppliers might not be paid. If required, a registered LPA could also be used during periods of temporary absence when you are unable to deal personally with the business’s affairs.
Limited companies
The first step for limited company directors and shareholders is for the terms of the company’s governing documents, the Articles of Association, and any shareholders’ agreement to be checked.
The Articles are likely to provide that if a director becomes incapacitated, he or she will cease to be a director. A shareholders’ agreement could include provisions which may have a potential adverse impact, for example an obligation on the individual to offer their shares for sale in these circumstances.
Without a shareholders agreement or an LPA, the business would likely come to a standstill.
What happens if I don’t have an LPA?
If you were to become incapacitated, then without an LPA, an application would have to be made to the Court of Protection for someone to be appointed as your deputy. This process can take months, and the costs involved are much higher than those associated with obtaining a Lasting Power of Attorney.
In the meantime, who knows what will happen to your business? It makes so much sense to apply for an LPA now and never have to use it. Think of it as an insurance policy that could keep your business running successfully.
Next steps
If you wish to draw up an LPA to protect your business, I can advise you on how this should be done for your business.
The information I’ll need is your business articles, shareholders’ agreement (if any) or partnership agreement, and I can then guide you through the process ensuring that the final document is the best for your circumstances.