The Scottish Paralegal Association

Powers of Attorney – a vital safeguard for your business

17 May

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Discussions around Powers of Attorney (PoA), which don’t top anyone’s list of interesting conversation topics, tend to focus on elderly relatives and planning for old age. But this association risks other people overlooking them – with disastrous consequences.

Top of this list is anyone who runs their own business. Let’s suppose you’re a sole trader or run a small company. If you were suddenly incapacitated by serious illness or injury, who would pay suppliers, manage the bank account, deal with contracts or insurance, file VAT returns or generally keep customers happy?

If your business bank accounts are in your name and you have no PoA in place, no one would be able to take over managing the finances. This could be catastrophic for your credit record, business relationships and reputation, as well as for dependants relying on your income.

Any relative or colleague who wanted to take up the reins would have to apply to the courts for ‘Guardianship’ – a process which can take six months or more. Few businesses could survive such a hiatus.

Worst of all, this would be happening when family and friends are already struggling with other practical and emotional issues around your illness or injury.

A simple way to protect against situations like these is to set up a business PoA. It’s similar to a ‘personal’ PoA in that you authorise a chosen person to make decisions on your behalf, but it applies to the business only. The business attorney doesn’t have to be the same person as your personal attorney – in many cases, different people will be better suited for each task.

How you set up a business PoA depends on whether you operate as a sole trader or have a company or partnership. Existing partnership agreements or company articles of association may well have provisions for what happens if a partner or director becomes incapacitated, so a power of attorney must not conflict with these. Advice is therefore important.

In the midst of all the paperwork that faces business owners, few will have an appetite for more legal advice and documents. But as with many areas of law and business, it’s cheaper to think ahead than have the business paralysed by legal disputes or problems later on. In this sense, a PoA can be seen as similar to insurance – something you hope not to use but are relieved to have if disaster strikes.

While we’re on the subject of safeguarding your business against things going wrong, some other simple legal planning could be useful.

With family businesses in particular, the personal and the commercial cannot be treated in isolation. Events from divorce to someone dying without a Will can jeopardise the future of the business, or land it with expensive legal and accountancy bills.

Take Wills. It’s estimated that around six out of ten people in Scotland die without a Will, which means that who inherits their estate is determined by Scotland’s intestacy rules. This can lead to problems and undesirable outcomes in any situation, and particularly with family businesses.

With a Will in place, there can be a planned and pragmatic succession plan about who’s best to take over the business (though as with POAs, advice will be needed to ensure the Will doesn’t conflict with partnership agreements or articles of association).

Without a Will, the intestacy rules will determine who inherits. In some cases, this could mean very young children or a distant relative inheriting control of a family firm – with poor consequences for staff and other family members.

Divorce too can be protected against. A prenuptial or postnuptial agreement can ringfence a family business from being included in divorce or separation settlements, and safeguard its financial stability.

All this matters not only to families, but to other businesses and Scotland’s economy too. Around 98 per cent of businesses in Scotland are small (with 0-49 staff), and if you’re not part of one yourself, you probably have them among your key suppliers, clients or customers.

Assuming we all want them around for the future, a few more conversations around PoAs (and Wills) should probably be on your agenda. Not great chat, to be sure, but important nonetheless.

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