Article

The benefits of a Lasting Power of Attorney for your business

8 October 2024

It is difficult for anybody to contemplate that they could lose mental capacity, particularly at a time when they are fit and well. However, mental incapacity can affect individuals at any stage of life and none of us know what the future will hold.

Therefore, if you are a business owner or in a position of responsibility, it’s vital to consider who might step up if you are not able. Putting effective protections such as a Lasting Power of Attorney (LPA) in place is therefore a part of responsible business future-proofing. It will ensure your business affairs can be taken care of if the unexpected should occur.

What is a Lasting Power of Attorney?

An LPA is a legal document that allows a person to choose an individual or individuals (Attorneys) to act and make decisions for them should they become unable to do so in the future.

There are two types of LPA:

  • One that covers property and financial decisions (this type of LPA covers issues connected to businesses); and
  • One that covers health and welfare decisions for the individual personally.

An LPA allows the maker to retain control of their affairs by choosing who they wish to act for them, and when and how they can act.

Multiple LPAs can be created to cover the same person and the same period of incapacity. This allows business and personal affairs to be managed separately by appropriate individuals.

LPAs must be made at a time when the person has sufficient mental capacity. For that reason, it is not advisable to ignore this important planning exercise because circumstances may overtake you and you may find yourself unable to put LPAs in place.

LPAs can last throughout the person’s lifetime, although you can revoke them whilst you have capacity. They will prove to be a valuable investment if the worst should happen.

The way an LPA could benefit your business will depend on your ownership structure:

Sole traders

If you are a sole trader, you are your business and your business does not have a separate legal personality. As a result, any incapacity that affects you has a direct impact on the business. Your bank accounts may not be accessible, bills and contractors could be left unpaid and your business could grind to a halt.

An LPA would allow you to appoint people you trust to continue to make decisions to keep the business running.

Company Directors

As a Director, you are responsible for the decision-making and management of the business. A loss of mental capacity could therefore have a devastating impact on Company functions. It could impact essential decisions such as authorising payroll and completing on an important contract.

The role of a Director is a personal one and it cannot be delegated under an LPA. As a result, it may be necessary to terminate the individual’s appointment as a Director. How this can be done will depend on the Company’s Articles of Association, so care should be taken to review any bespoke articles of the Company.

In the absence of any express authority to remove a Director due to incapacity, Shareholders have the power to remove the incapacitated Director under section 168 Companies Act 2006. An Attorney who acts on your behalf as a Shareholder may have voting rights on your behalf (see below).

Shareholders

As a shareholder, you hold a beneficial interest in the business. Your interest is not lost by virtue of incapacity and you can still receive dividend payments. However, you would not be able to transfer, dispose or otherwise deal with or vote on your shares.

If you have an Attorney under an LPA, they will be able to vote on your behalf as a Shareholder, unless this is restricted in the LPA, Company Articles or any Shareholder’s Agreement. It is therefore vital to give careful thought to who may be able to act for you in those circumstances and whether this would be appropriate for the business.

Partners in a Partnership

The impact of incapacity on the partnership depends primarily on the terms of any Partnership Agreement. As with Directors, Partners cannot delegate personal performance. Whether or not decisions can be made by any Attorney would depend on whether the activities and duties of the Partner are personal to the individual.

Top Tips

  • Get a full suite of legal documents for your business. Just as ‘key man’ life insurance may play a part in your business protection, so too should bespoke agreements and suitable Articles of Association.
  • Plan ahead with LPAs both in your personal life and in your business.
  • Choose your Attorneys carefully. Not everyone will be suited to the responsibility of acting as an Attorney. Trusted individuals with the appropriate skills to manage your affairs are generally the preferred choice. Professional Attorneys can ensure independence and expertise to deal with your affairs.
  • Seek advice early if you are unsure what the implications might be for you and your business if a key individual loses capacity.

Related articles

View All