Protecting your family business in the event that you lose mental capacity

The growing prevalence of dementia means many people have become aware of the benefits of setting up a lasting power of attorney (LPA), so that in the event that they develop dementia a trusted person they have chosen can make decisions on their behalf relating to financial and health matters.

But if you are a shareholder of your family business it is important to have a separate LPA covering your stake in the business. Here we look at what you need consider when setting up a business LPA.

A lasting power of attorney (LPA) is a legal document that allows someone (your ‘attorney’) to make decisions for you, or act on your behalf, if you are no longer able to or no longer want to make your own decisions.

There are two types of LPA. The first relates to decisions about property and financial affairs and enables your attorney to deal with day-to-day personal financial matters such as managing a property, paying bills, investing money and managing bank accounts.

The second type of LPA relates to your health and welfare. It enables your attorney to make key personal decisions such as the type of healthcare and medical treatment you receive and where you live, as well as day-to-day matters such as your diet and routine and who you have regular contact with.

However, if you are a shareholder of a business, it is likely to be a wise move to appoint different attorneys for your personal financial matters and your business responsibilities, not least because the attorney for your personal matters may not have the experience or qualifications to make decisions relating to your business role. 

You should give careful consideration to who you appoint as your attorney for your business LPA as it is a role that involves important responsibilities and powers.

The skills and experience they will need will depend on your business and the decisions you are involved in.

The LPA should set out the scope of the role and can also include guidance or instructions to help your attorney exercise their powers in line with your wishes.

You may also wish to appoint a replacement attorney in the event that your attorney becomes unwilling or unable to carry out the role in the future – for example, in the event of their own loss of mental capacity, or their death.

An LPA doesn’t have to be used straight away but if it has been registered with the Office of the Public Guardian it can be used at any point with your consent, in the case of a financial or business LPA, or by your attorneys in the event that you have lost mental capacity.

This means you retain control over the decisions the LPA covers unless you no longer have the capacity to make them – and you have the peace of mind that comes from knowing if this situation arises, the person or people you have appointed will act on your behalf.

You should note, however, that a business LPA cannot cover any role you hold as a director of your business and that, under your company’s articles of association, this role would normally cease if you lose mental capacity.  The model articles state that a person ceases to be a director if they are certified by a medical practitioner as having lost capacity and that this will continue for more than three months.

It is therefore important to also have a business plan in place to cover who would step up to your role if you lose mental capacity.  Without it, your business operations may be interrupted, or the viability of the business threatened, if you are unable to make decisions and fulfil your responsibilities.

If you lose the capacity to make your own decisions and don’t have a power of attorney your family can apply to the Court of Protection to have a deputy appointed who can make decisions about financial and health and welfare matters.

The cost of applying to the Court of Protection is greater than the cost of preparing and registering an LPA and, while the Court can handle urgent or emergency applications where a decision must be made quickly, there can be delays in appointing deputies to make ongoing decisions – delays that can have a detrimental impact on your interest in your business.

It is also possible that the deputy appointed by the Court to make decisions on your behalf is not the person you might have chosen when you had the capacity to do so.

Making arrangements for an LPA and putting a business plan in place today doesn’t mean handing over control before you are ready to – in fact, early planning puts you in control by ensuring that if you’re unable to make decisions about your business, a person of your choice will do this on your behalf.

And, as long as you have mental capacity, you can revoke an LPA and put a new one in place at any time. 

If you would like more information about Lpa’s please speak to Amanda Simmonds, head of our family business team and senior associate in our Wills, Trusts and Estates team.

Each individual’s circumstances and needs are different, as are the requirements and governance of every family business, but obtaining professional advice will uncover all the issues you need to consider when setting up a business LPA.

This article originally appeared on the Family Business United website on 1 March 2023.