Most people understand the benefits of a lasting power of attorney and how they allow individuals to nominate someone to make decisions on their behalf if they become incapacitated in someway or do not have the ability to manage their finances.
Less well known is the ability to put an LPA in place for a business, which makes sense when the sudden illness of a business owner could have serious ramifications for that business and its workforce, to say nothing of the owner’s livelihood too.
Lack of awareness is typically why business owners do not adopt a business LPA. Without one, the business will have to rely on the Court of Protection to appoint a deputy, which is often a lengthy process. Being unable to access business bank accounts or make decisions for months could precipitate a quick demise for many businesses, adding to the owner’s problems.
It is often best to have an LPA in place, even if never used, so that it is there should something serious befall the business leader. The person trusted to step up and run the business can oversee the business bank accounts, and immediately deal with issues such as invoices, wages and tax matters, as well as assessing and signing contracts.
A sensible precaution
As a business owner, if you become unable to make decisions for any reason, it could severely impact on a vast number of people and ultimately the fate of your business.
The benefits of having an LPA in place for your business are therefore apparent; every person your business encounters, from suppliers and creditors to clients and employees, could benefit from you having a trusted individual nominated to keep things running should you become incapacitated for any reason.
The people closest to you can also take peace of mind from knowing that there are measures in place to ensure the continuity of income from the business (from its continued operation) should something happen.
So why are LPAs for businesses so uncommon? Lack of awareness seems to be a key reason, with many business owners simply unaware this is an option. Some people fear that even a temporary period of mental incapacity may lead to them permanently losing control of their business interests.
The Mental Capacity Act 2005 deals with this concern, requiring the attorney you appoint to ‘so far as reasonably practicable, permit and encourage the person to participate, or to improve their ability to participate, as fully as possible in any act done for them and any decision affecting them.’
Others are content that in circumstances where capacity is lost, the Court of Protection will appoint a deputy. While this is true, it can also present some serious issues. Appointing a deputy can take several months, during which time, the decision-making processes, and daily operations of a business, without leadership or direction from the top, can fall apart.
The appointment of a deputy is also an expensive process ‒ the combination of the long timescale and costs can significantly impact a business. On the other hand, putting a business LPA in place ensures that a person you know, and trust will take the reins immediately, and can begin to deal with the usual running of the business without delay or unnecessary costs.
What can it be used for
Once a business LPA is in place, the trusted individual can oversee a range of important business functions and operations on behalf of the business owner, unless restricted on page five of the LPA.
These key business decisions can be made across a range of areas, including:
Business contracts;
Sale or acquisition of business property;
Paying wages or taxes;
Hiring or removing employees;
Control and management of business assets;
Managing business health and safety issues;
Marketing;
Litigation.
For this reason, a distinction should be made in the LPA between running and working within the business, as LPA attorneys can only make decisions as authorised by the donor. Without this distinction, you may not give adequate permissions to your trusted individual, resulting in the downfall of your business. As with a personal LPA for financial affairs, a business LPA may be used prior to the donor becoming mentally incapacitated.
What you can expect
Once you have decided to implement a business LPA, it is important to be aware of the process that will follow and the questions that will be asked before it can be prepared.
Firstly, it is the responsibility of legal advisers to conduct a thorough business evaluation, before taking the time to understand why the donor wants to make a business LPA.
A business LPA separation clause would be drafted to exclude decisions about the donor’s personal financial matters. Where applicable, a memorandum of wishes could also be drafted to ensure that the donor has clearly set out their wishes about how the attorney should operate the business. As the donor, it is important to think about and prepare answers for several questions, including how many businesses you have and if there are other business partners or owners.
It would be helpful if the attorney is made aware of your plans for the business. The specialist preparing the LPA will need you to disclose any potential conflict of interest with the proposed attorney and provide detailed information about why they are a suitable choice to take control if needed.
What makes a suitable attorney?
Whilst your choice of attorney may seem obvious, it is important to choose carefully as there could be other key factors to consider before making a final decision.
According to paragraph 7.8 of the MCA Code of Practice: “A donor should think carefully before choosing someone to be their attorney. An attorney should be trustworthy, competent, and reliable. They should have the skills and ability needed to carry out the necessary tasks.”
As the donor, you can sometimes be blinded by loyalty, making decisions based solely on the closeness of your relationship with the individual. However, it should be remembered that the attorney will also be responsible for the livelihoods of your employees, so they must be qualified to undertake the job. Before going ahead, it is important to take a step back and evaluate the magnitude of the decision. If the attorney has a limited understanding of the work involved or your business, then it may not be the right appointment.
Of course, it is unlikely the attorney will have the same level of understanding and knowledge as you, but they must be competent in dealing with important business issues and know when to seek additional support.
Separation clauses
When it comes to drafting separation clauses in an LPA, it is important to ensure that these are clearly and precisely worded so that the scope of the Business LPA is limited to the donor’s business affairs only. The donor can make a separate LPA for the management of their personal financial matters, which would include a similar separation clause excluding from its scope decisions about business matters.
For donors with only one business, it may be wise to have a specific business LPA clause. On the other hand, donors with multiple businesses may decide to adopt an open clause that covers all their businesses or alternatively, they may make separate LPAs which appoint separate attorneys to handle each business accordingly.
Of course, making this decision can be difficult if you have little experience of dealing with LPAs, so it is best practice to consult a specialist who will help you find the right solution.
Make the arrangements now
If you are a business owner and wish to discuss setting up a business LPA, then please do get in touch and we can guide you through this process and make sure it is done in the correct manner.
Ultimately, the long-term security of your business and employees are at stake. Without a business LPA, you risk jeopardising everything you have worked hard to build over the years