13 January 2022

How to protect your business if you lose mental capacity

By Miranda Marshall, Director, Hayes + Storr.

With people seeking greater flexibility and a better work-life balance, small and medium-sized businesses (SMEs) now account for 99 per cent of all private businesses in the UK.

Launching and building your new start-up is an exciting time. Contingency planning is vital. Many entrepreneurs omit to consider the impact that future health problems might have on their business.

A separate Lasting Power of Attorney (LPA) for your business interests is the best way to protect your enterprise if you lose mental capacity.

What would happen if you became seriously ill, or had a serious accident or a debilitating illness which left you unable to carry out your duties within the business, in the short or long term?

This can depend on the business structure and whether you have fellow directors or partners. If you do, then your business (or your share of the business) would be managed in accordance with any pre-existing agreement between you and your partners or co-directors. You should always discuss any proposed LPA for the business with them. You must make sure that the LPA does not conflict with your business structures or other agreements already in place.

Many start-ups and family businesses operate without formal corporate structures or agreements. If you are a sole director without a LPA, and no other signatories on your business bank account, no one has authority to run your business and make decisions. Even if your bank account has another signatory, the authority is likely to be limited to operation of the bank account only.

Increasingly, people already have a financial LPA with no distinction between personal finance decisions and business decisions. Your attorneys have authority to make personal financial decisions on your behalf, but they may not be the best people to deal with your business affairs. Their involvement could cause problems; so, if you have appointed your spouse or children to deal with your finances, but they are not familiar with your business, then their input might be problematic for your business partner or manager.

If you lose capacity and have not put in place a business LPA, your business partner or a staff member, or a member of your family, could apply to the Court of Protection to be appointed as your ‘Deputy’ to deal with your business affairs on your behalf. An application to the Court is expensive and takes several months, during which time no one would have authority to run your business.

Pre-planning in this way is not only beneficial to you and your business, but it prevents additional stress being placed on your family etc. Instead of having to worry about your business affairs, they can concentrate on helping you with your personal financial and healthcare concerns.

Having a LPA in place for your business decisions creates greater certainty for customers, suppliers, and others you work with, as they will be able to continue engaging with your business without major disruptions.

The process for a business LPA is the same as one for your personal financial affairs. You will need to appoint one or more persons whom you trust.

For most people, it is unlikely that you will want your business attorney to have access to your personal finances, so it is crucial to make sure that your authority appropriately limits the scope of your attorney’s decision-making.

You will, therefore, need to make two LPAs; one which specifically relates to your personal finances only, and another which specifically relates to your business affairs only. Appropriate drafting is key, and your solicitor is the best person to help with this.

By including preferences and instructions to guide your attorneys they can then confidently make decisions on your behalf knowing that they are carrying out your wishes. Such preferences and instructions must be considered carefully, as they must be both legal and workable. If you are unsure about what guidelines you may include, seek advice early to prevent delays and additional costs when it comes to registering your LPA.

Obtaining qualified and specialist legal advice and having your LPAs professionally drafted protects all your business interests.

If you require further information on Lasting Powers of Attorney, call Miranda on 01263 712835​ or email: miranda.marshall@hayes-storr.com.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.