Knowledge Hub | Articles

24 February 2021

When is a business LPA needed?

If a business owner is incapacitated, then close family members and colleagues may not have an automatic right to step in and make business decisions on their behalf. This could result in bank accounts being frozen, loans by banks being called in and overdraft facilities ceasing.

The starting point is to look at how the business is structured to decide whether a business LPA is needed.

Sole trader

Business LPAs are particularly useful for sole traders. It is likely that a sole trader’s business is not a separate entity from the business owner. This means if the business owner is incapacitated, no one will have an automatic right to step in and run the business.

Partnership

If the business consists of partners, then there may already be a partnership agreement in place. It is important to review the agreement and see whether suitable provision for incapacity has already been made.

If there is no provision for incapacity, or the provision is inadequate the partners may wish to update their partnership agreement or create a compatible Business LPA alongside the agreement.

It is important for a member of a partnership to have an LPA in place to ensure they have someone to represent their interests.

Companies

The starting point is to check the articles of association and any shareholders’ agreement to understand what provisions are in place if a director is incapacitated. If there is no such provision, or inadequate provision, it is sensible to seek legal advice with a view to amending the articles of association and/or shareholders’ agreement. Our corporate team can assist with this.

Whilst a director is unable to delegate their decision-making capabilities, if that director is also a shareholder, especially if they are the sole or major shareholder, they should have a Business LPA in place to help ensure business continuity.

The attorney appointed on behalf of a shareholder cannot run the company, however, if the incapacitated shareholder has voting rights in respect of matters affecting the company, such as the appointment or removal of directors, those can be exercised by the attorney.

What happens if there is no Business LPA in place?

If any of the aforementioned business scenarios apply then in the absence of a Business LPA (or well drafted articles of association/partnership agreement) an application to the Court of Protection to appoint a Deputy may be required.

The application for Deputyship is expensive, takes several months and is likely to be financially detrimental to the business – throughout this period no one may have the legal authority to make day to day business decisions.

Who should you choose as an attorney?

It may be considered appropriate to separate personal financial affairs from business affairs. Different attorneys can be appointed to carry out each role and the documents can be made alongside each other. This is particularly useful if for example, family members are suited to manage personal financial affairs but are not involved in the day to day running of the business and may not possess the required expertise or knowledge of the business.

When choosing an attorney for a business LPA, in addition to ensuring they have the relevant skills, a donor should consider if their chosen attorney may be put in a position of conflict, particularly if they are already involved in the business.

If you would like further information on any of the points raised, please contact our private client team on 01753 889995 or enquiries@bpcollins.co.uk. We will work with you to offer our advice and involve our corporate team where appropriate.

Pardeep Bancil

Pardeep Bancil

Tel: 01753 279087 | 07341 566326

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