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Home » Latest News » What is a Business LPA and Why Might I Need One?

What is a Business LPA and Why Might I Need One?

What is a Business LPA and Why Might I Need One?

We believe that having appropriate LPAs in place is a vital part of the forward planning of any business.

What does LPA stand for?
The initials LPA stand for ‘Lasting Power of Attorney’. 
 
What is a ‘Lasting’ Power of Attorney?
It is a legal document which provides another person with the legal authority to carry on your affairs should you  lack the capacity to make decisions either because you have suffered a serious injury or as a result of you losing the mental capacity to do so.
 
Why ‘Lasting’?
LPAs must be registered with the Office of the Public Guardian before they may be used. It is a more specific form of the general power of attorney (POA). POAs have a more limited use than LPAs in that the former can only be used up to the point when a person, often referred to as the donor, loses the capacity to look after their own affairs. Those affairs may be of a personal, financial or business nature. As such, prudent donors would be best advised to make LPAs. For business owners, it could be said that making a Business LPA is as important a business decision as taking out employer’s liability insurance or their own life insurance policy.
 
What happens if a person has not signed  a Business LPA and they cease to have the capacity to manage their business affairs?
Although this would be a devastating blow for the family of the donor in any circumstance, should the donor-owner be an integral part of a business, the effects can be crippling and lead to severe financial implications for not only the donor and their family, but also for the business in which the donor plays such an integral part.
 
If a business owner does not make a Business LPA and then becomes incapacitated, it may become necessary for an application to be made to the Court of Protection so that a deputy can be appointed on their behalf. The deputy would then be able to act in place of the incapacitated business owner. 
 
There are numerous reasons why this would be undesirable;
 
  1. It would be costly – certainly much more so than the cost of taking out a business LPA in the first place.
  2. It is likely to be time consuming – the application can take 5 to 6 weeks to get stamped. From that point, the court will aim to issue an order within 21 weeks (with ‘aim’ being the operative word), depending on any court delays through backlog of work, that take place. In reality, it could take anything between 6 and 9 months before an order is made. That length of time, without anyone able to make effective business decisions, could cause severe problems for the business. In some cases, it may cause terminal problems.
  3. Once the Court of Protection has made the order, it’s possible that the deputy appointed by the court, may not be the person that the business owner themselves would have seen as the best person to run their affairs.
 
What do we mean by the term ‘owner’ of a business?
The most common types of business ownership structures are;
 
  1. 1. Sole traders 
    Businesses run by sole traders are particularly vulnerable to the problems caused by the business owner becoming incapacitated. Whilst many sole traders are family run or small businesses, where others within the organisation could take over much of the day to day running of the business, the sole trader may well be the only person who can make payments from the bank account, enter into business contracts, pay suppliers and to pay the staff their salaries. 
    All businesses are run in different ways and in those where the sole trader who ceases to have  capacity is very much the driving force, making all the important decisions, the loss of the owner’s leadership qualities will be felt as much, if not  more than their ability to authorise payments from the bank account.
    That is why, when deciding who will be granted the LPA, careful consideration needs to be given as to whom should be granted power of attorney.  Another member of the team may be suitable, but it is often advisable for sentiment to be put to one side and to look outside the business for the right person. That person might be someone with the appropriate experience of managing a business. 
  2. Partnerships
    Some partnership agreements may already have provisions in them to say what will happen in the event of a partner becoming incapacitated. However, many partnerships have no written agreement in which case they will by, default, be subject to the provisions of the Partnership Act 1890. This Act says nothing about what will happen if one partner becomes unexpectedly incapacitated. For that reason, where there is no formal partnership agreement, it is highly advisable for the partners to all take out LPAs, as they are highly vulnerable if they do not.
    Even if there is a written partnership agreement and it does contain a relevant provision, it is a sensible idea to take legal advice, to ensure that the terms of the incapacity provision do not conflict with other terms of the existing agreement.
  3. Limited Companies
    Companies are governed by their Articles of Association and like written partnership agreements, they are likely to have provisions that govern the situation where a director comes to lack capacity. However, this should not be taken for granted and a review of the terms of the Articles is to advisable to ensure that position is covered and if not, for action to be taken to rectify the situation.
    If there is a relevant provision, then it’s likely that it will be to the effect that the incapacitated director’s contract will be terminated. A word of warning for companies where there is only a sole director - it is unlikely that the Articles will provide for a director’s contract to be terminated in the event of incapacity because this would leave no one running the company. It is therefore of the utmost importance that companies with a sole director, take advice on appointing an attorney by means of a business LPA. 
    Another pitfall that lays in wait for the unwary, is that under the terms of the Mental Health Discrimination Act 2013, partners or directors who lose capacity cannot be removed unless specifically provided for in the Articles of Association or the partnership agreement (if one exists). The validity of some clauses that relate to termination due to incapacity, may also be invalid, as a result of the provisions of the Mental Health Discrimination Act 2013.
 
I already have a LPA for my personal affairs, won’t that cover my business affairs too?
If you already have an LPA to take care of your personal affairs, then whilst that attorney may be the right person to look after your personal affairs, such as your own finances, matters relating to your personal property, or any medical attention that you might need, that same person might not necessarily be the right person to look after your business affairs. 
 
It is important that when choosing a business attorney, that you are confident in the ability of the attorney to run your business affairs effectively. Does the intended attorney have the necessary business management experience and will they look after your business affairs in the manner that you would want them to be conducted? Sometimes, the answer is to look to someone outside your family or your business, such as an accountant or a solicitor, to be the appropriate attorney. It is quite in order and indeed advisable in many instances, to set up separate LPAs – one personal and one business so that there will be an attorney looking after each aspect of your affairs.
 
Taking Legal Advice on whether a Business LPA is appropriate
We believe that having appropriate LPAs in place is a vital part of the forward planning of any business. If you are thinking about making a lasting power of attorney, please contact Jacqui Johnson at Bridge McFarland LLP on 01472 311 711 or by email at info@bmcf.co.uk
Jacqui is a partner based at our Grimsby and Hull offices. She is the head of the private client department, and deals mainly with complex Wills and powers of attorney, disputed Wills and probates, inheritance tax planning and Court of Protection matters (including statutory Wills and gift applications).