The importance of business lasting powers of attorney 

Continuing business operation is more often than not associated with succession, insurance and shareholder arrangements, but what about the loss of capacity? One of the most practical and frequently overlooked safeguards is a business Lasting Power of Attorney (“business LPA”). 

A business LPA allows a business owner to appoint one or more attorneys to make decisions and take positive steps in relation to business assets and financial affairs if they become unable to do so. This can be critical when illness, accident, incapacity or prolonged absence would otherwise prevent a business from operating effectively. 

What Is a business LPA? 

A Lasting Power of Attorney is a document made in accordance with the Mental Capacity Act 2005. It allows an individual, known as the “donor”, to appoint one or more attorneys to act on their behalf. The LPA can be drafted so that it applies specifically to the donor’s business interests, rather than their personal financial affairs. In many cases, a business owner will have: 

1. a personal property and financial affairs LPA, dealing with personal bank accounts, property, investments and household finances; and  

2. a business property and financial affairs LPA, dealing with business accounts, contracts, staff, suppliers and operational decisions. 

Separating personal and business LPAs is often preferable because the person best suited to manage personal finances may not be the right person to manage a business. 

Why do business LPAs matter?  

If a business owner loses mental capacity without a valid LPA in place, no one automatically has authority to manage their business affairs. This can create serious practical and financial problems, particularly where the business depends on one individual’s authority to make decisions. 

A business LPA can help ensure that: 

• business bank accounts can continue to be operated; 

• wages, rent and suppliers can be paid; 

• contracts can be reviewed, renewed or terminated; 

• insurance, regulatory and filing obligations can be met; and 

• disruption to trading is minimised. 

Without an LPA, an application may need to be made to the Court of Protection for the appointment of a deputy. That process can be expensive, time-consuming and unsuitable for urgent commercial situations. In the meantime, the business may be unable to function properly, so it is imperative that all business owners have something in place.  

Who should consider a business LPA? 

A business LPA is particularly important for: 

• sole traders; 

• partners in a partnership; 

• members of a limited liability partnership; 

• company directors; 

• majority shareholders; 

• owner-managed businesses; 

• professional practice owners; 

• landlords with substantial commercial property interests; 

• farmers and agricultural business owners; and 

• individuals whose business relies heavily on their personal decision-making authority. 

Even where a business has other directors, partners or senior managers, a business LPA can still be valuable. It provides clarity about who may act for the individual owner in relation to their own business interest.  For instance, if you are a business owner with significant control, it would seriously impact the ability to run the business.  It would also impact any sale of the business too.  

Choosing the right attorney 

The choice of attorney is central to the effectiveness of a business LPA. The attorney should be trustworthy, financially competent and capable of making commercial decisions under pressure. 

A business attorney may be: 

• a fellow director; 

• a business partner; 

• a senior manager; 

• a professional adviser; 

• a family member with relevant business experience; or 

• a combination of individuals acting jointly or jointly and severally. 

The donor should consider whether the proposed attorney: 

• understands the business; 

• has sufficient financial and commercial experience; 

• can act objectively and in the donor’s best interests; and  

• has any conflict of interest. 

Defining the attorneys’ powers 

A business LPA should be carefully drafted and advice about the appropriate wording is crucial. It may include instructions and preferences explaining how the attorney should act and what matters they may deal with.  It is imperative that the wording is very clear and precise in the business LPA to ensure it addresses all business interests together with excluding personal interests, particularly where there may be a personal LPA already in place to avoid any conflicting language being used in the document(s).  

Registration and timing 

An LPA must be registered with the Office of the Public Guardian before it can be used. Registration can take time, so it is prudent to prepare and register the LPA well before it is needed. 

A Property and Financial Affairs LPA can be drafted so that it may be used while the donor still has capacity, with the donor’s consent, or only once the donor has lost capacity. For business purposes, careful thought should be given to when the attorney should be able to act. In some cases, the donor may want the attorney to assist during periods of physical illness, travel or temporary inability to manage business affairs, even where mental capacity remains intact. 

Business succession planning 

A business LPA should not be treated in isolation. It should sit alongside other planning documents, including: 

• a will; 

• shareholders’ agreement; 

• partnership agreement or LLP agreement; 

• company articles of association; 

• key person insurance; 

• cross-option or business protection arrangements; 

• business continuity plans; and 

• tax and succession planning documents. 

Together, these documents help ensure that the business can continue operating, be sold, or be passed on in an orderly way if the owner dies or loses capacity. 

Conclusion 

A business LPA is a practical and powerful tool for protecting a business against the consequences of incapacity. It gives attorneys authority to act when urgent decisions may be required and helps preserve business continuity, value and confidence among employees, customers, suppliers and stakeholders. 

For business owners, particularly sole traders, partners, directors and shareholders in owner-managed companies, a business LPA should be regarded as an essential part of lifetime and succession planning. It provides certainty at a time when uncertainty could otherwise threaten the stability of the business. 

Need help putting together a business LPA? Contact Amy Lane HERE for expert legal advice.