If you are a partner, director, sole trader or business owner your business could be at risk. No one likes to think that something could happen to them, however have you considered what would happen to your business if you did lose capacity?
Under Section 2 of the Mental Capacity Act 2005 it is stated that: “a person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain.”
This can happen on a permanent or temporary basis, as the result of an accident or an illness.
What happens if you lose capacity and you are the director of a company?
Under the Mental Health (Discrimination) Act 2013 mentally incapable Directors, Partners and business owners are no longer removed if they lack mental capacity, either long term or temporarily.
What could this mean for your business?
Imagine a scenario where you, or your business partner is now unable to make decisions about your business, including the day to day running of the same.
When you lose capacity who do you think is able to make decisions in regards to your business?
If there are accounts which require the authorisation of all those named, or are in the name of this individual then these may become inaccessible during this period of incapacity. This can result in staff and creditors not getting paid, loans defaulting and rent or mortgages going into arrears. Your business may need to renew their insurance and enter into business contracts.There may be votes that need to be taken which require unanimous or majority vote share which cannot be reached without the individual who has lost capacity.
The individual may only be incapacitated for a temporary period, however the affect that this can have on the business can be profound. In particular, sole traders and business owners may be the only individual named on most accounts and the only individual who is able to make decisions in regards to their business. This could drastically limit the life expectancy of your business.
When there is no one who is able to make decisions in regards to your business, how long can your business last?
If no one in your business has legal authority to act, this may result in the banks freezing your accounts. Someone could apply to the Court of Protection and be granted the authority to make these decisions on your behalf. However this can be both expensive and slow, at a time when you cannot afford for either.
So how can you avoid this happening?
As incapacity could happen to anyone of any age, however healthy they are, it is prudent to prepare for the possibility.
A LPA is a legal document that enables a selected person, or persons, to act on behalf of an individual who is mentally or physically unable to do it themselves. You could even appoint one of the other Partners or Directors.
This way you decide who would deal with your business affairs should you become incapacitated. An LPA can cover both your personal and business affairs or you can restrict it to business affairs only.
The good news is than an LPA is an allowable taxable expense and it could save you a lot of money in the long run, by preventing your business from folding in the unfortunate event that you become ill or have an accident.
So what does a LPA allow the attorney to do?
In most circumstances your attorney(s) can do the following on your behalf:
- Buy and sell property;
- Organise property insurance and repairs;
- Access your bank statements;
- Open and close bank accounts;
- Invest your assets; and
- Deal with your tax affairs
You can tailor your LPA to meet your needs. A LPA can be structured such that it will only be capable of being used should you lose mental capacity. You can attach special conditions to your LPA being activated and you can provide instructions and scenarios of preferences for action which you would like taken.
Under the Mental Capacity Act 2005 your attorney(s) must act in your best interest and must follow a Code of Practice. This includes taking into consideration any views and beliefs you have expressed in the past.
If you sell your business or retire, you can revoke your LPA at any time.
Can you afford the risk?
As a business owner it is important to have a contingency plan, consider what might happen to the business if you should be incapacitated by illness or injury, who would take over the running of the business and its financial and property affairs, and what would it mean for your employees’ financial future.
Whilst there may be ‘an understanding’ amongst your colleagues of what would happen should illness or injury take you away from the business, in the eyes of the law this isn’t sufficient. Unless you have appointed an attorney, fundamental business operations may not be possible.
Can you afford the risk?