PROTECTING YOUR BUSINESS, ARE YOU COVERED?

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Protecting your business, are you covered?

Do you know what would happen to your business if you were to lose mental capacity or pass away? Not the happiest question but knowing the answer to it will ensure that your business can continue without you, protecting the value of the business as well as looking after your employees, customers and suppliers.

The starting point for what needs to be done depends on the structure of your business; things need to be dealt with differently depending on whether you operate as a sole trader, partnership (with or without an agreement) or as a limited company. I’ll take each structure in turn, but first a summary of the documents.

Lasting powers of attorney

A Lasting power of attorney (LPA) allows you to choose one or more people to take decisions for you if you lose mental capacity, temporarily or permanently. There are two types, one for financial decisions and one for health decisions. Whilst both are important, in this article I’ll be referring to financial LPAs. If there is no LPA in place, then an application needs to be made to the Court of Protection to appoint a deputy. However, it currently takes the Court over 9 months to grant a deputyship, so it’s not a quick process. Whilst an attorney can make decisions whilst you do not have capacity, when you die the power under the LPA dies with you. At this point the terms of your Will take over.

Wills

As a business owner, you probably want the value you’ve built up in your business to pass to your family, but they might not necessarily be the best placed to deal with the day to day running of the business. Putting a will in place will allow you to:

• Choose who will administer your business

• Choose who will inherit the value of your business

• Time when your family will inherit your business

• Save Inheritance Tax

• Protect the business from divorce or bankruptcy

Sole trader

As a sole trader, there is no legal distinction between you and your business. Therefore, putting an LPA in place allows someone to make decisions in your place if you lose capacity You might want to appoint different people to deal with your business assets and your personal affairs, but you’ll need to make sure that the two LPAs are accurately drafted so there is no confusion.

When a sole trader dies, their business assets along with all their personal assets are frozen until probate is granted. Only once probate is granted, the executors will be able to access the assets and wind up the business.

Author Elaine Roche Partner | Tax and Probate

Partnership

The starting point for a partnership is your partnership agreement; what does it say happens when a partner losses capacity or dies? If you are an informal partnership, the Partnership Act is silent on what happens on the incapacity of a partner. However, if there is an LPA in place, the attorney can step into that partner’s shoes to make decisions alongside the other partners.

To ensure a partner’s family don’t have to get involved with the business, you should put a business specific LPA in place which appoints another partner as the attorney to make business decisions.

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If you don’t have a partnership agreement and a partner dies, under the Partnership Act, the partnership is automatically dissolved, which cause issues for the remaining partners wishing to carry on the business as well as for the family of deceased.

If you do have an agreement, make sure that when a partner dies their share does not automatically pass to the other partners. If this happens, the share does not qualify for the CGT uplift that assets usually get when the owner dies. This could result in an unexpected tax bill further down the line which could have been avoided if the share has passed under the deceased partner’s will.

Limited Company

In a limited company, director’s decisions need to be considered separately from shareholders’ decisions. It is possible to appoint an alternate director to stand in and take director’s decisions. However, the powers of an alternate director are tied to the original director. If they die or lose capacity, the alternate directorship comes to an end. Directors’ decisions cannot be delegated so an LPA is of no use in this situation.

Directors are appointed by shareholders. So, if there are enough shareholders to form a quorum, they can appoint a new director to replace any incapacitated or deceased director.

If a shareholder has lost capacity, an attorney can step into their shoes and vote at shareholder meetings, including to vote on the appointment of a new director.

What happens when a shareholder dies is governed by the company articles or any shareholders’ agreement that is in place. A good set of company documents can ensure:

• Inheritance Tax reliefs are maximised;

• Your shares can pass to your family or a trust for their benefit;

• There is no automatic contract for sale;

• There is a cross-option backed by life insurance, so the other shareholders have the funds to purchase your shares from your estate;

Sole director and shareholder

Things are more problematic for business owners who are sole shareholder and sole director. If you lose capacity and don’t have an LPA there is no-one to vote in a new director to keep the business going.

When you pass away, if you have a will, your executor can step into your shoes as the shareholder. However, they cannot vote in a new director until they have probate, so there will be a period (6-12 months would not be unusual) where there is no-one to take the day-to-day decisions in your business. If you appoint a second director now there will still be someone to keep things running if anything happens to you.

As you can see, what needs to be done to protect your business is not one size fits all, so it is vital to review your situation and get specialist help to make sure your business is protected if something should happen to you.

Editor’s comment: Whilst rumours abound that IHT may be abolished, these are just rumours. Many business owners and individuals are shocked when they realise, often quite late in life, just how much inheritance tax they may have to pay and sometimes, for some, it can be too late to do too much about it. As can be seen from Elaine’s excellent article it pays to get your affairs in order well in advance, and whilst none of us like to think about dying or even losing mental capacity, we like Elaine, would advocate planning as early as possible especially where a business is involved, as unfortunately know of us know what is around the corner. If you or one of your clients would like to talk about planning for the future, please do get in touch.