If you own a business, you probably spend a lot of time thinking about how to grow it, protect its assets and plan for the future. But there is another question that is easy to overlook: what happens if a business owner loses capacity to make decisions?
A business owner loses capacity when they are no longer able to make or communicate decisions about their financial or business affairs. This could happen because of an accident, illness, injury or another circumstance affecting their decision-making ability.
Without appropriate legal planning, the consequences when a business owner loses capacity can extend beyond the individual. Important business decisions may become difficult to make, access to accounts and assets may be affected, and the people who usually help run the business may not have the legal authority to step in.
The good news is that planning ahead can help reduce uncertainty when a business owner loses capacity, giving your business a clearer pathway forward.
What happens if a business owner loses capacity?
Capacity is a legal concept referring to a person’s ability to make their own decisions. In Queensland, an adult is presumed to have capacity unless it is established otherwise, but when a business owner loses capacity, the impact can extend to the decisions and responsibilities involved in running their business.
If a business owner loses capacity, practical problems can arise because running a business often involves making regular financial and legal decisions.
Depending on the business, these decisions might include:
- Managing business bank accounts
- Paying employees and suppliers
- Entering into contracts
- Managing business property
- Dealing with customers and clients
- Making financial decisions
- Managing investments
- Buying or selling assets
- Making decisions about the ongoing operation of the business
If the owner is the person with authority to make these decisions, when a business owner loses capacity, it can create a gap between what the business needs to do and what someone else is legally authorised to do.
This is particularly important for small and family businesses where one person may hold significant decision-making responsibility.
Can someone else run your business if you lose capacity?
Not necessarily.
One of the most common assumptions is that a spouse, family member, business partner or trusted employee will simply be able to step in if something happens.
In reality, having a close relationship with the business owner does not automatically give someone legal authority to make decisions on their behalf.
An enduring power of attorney (EPOA) is one legal planning tool that can help address this issue.
In Queensland, an EPOA allows you to appoint someone you trust to make decisions about financial matters. Financial matters can include carrying on a business.
This is different from a general power of attorney. A general power of attorney can be useful for financial decisions while you have capacity, but it ends if you lose capacity. An enduring power of attorney can continue to operate when you lose capacity, subject to the terms of the document.
That distinction can be particularly important for business owners.
How can an enduring power of attorney help your business?
An EPOA can provide a legal framework for someone you trust to make financial decisions on your behalf.
When preparing an EPOA, you can consider who you would want to make decisions if you could no longer make them yourself and when you want their authority to operate.
For example, a business owner may want to consider appointing someone who understands their financial affairs and is capable of communicating with banks, professional advisers and other relevant parties.
Queensland Government guidance recommends carefully considering who you appoint and discussing your wishes and preferences with your proposed attorney.
It is also possible to appoint more than one attorney and specify how they are to exercise their powers.
However, an EPOA should not be viewed as the entire business continuity plan.
It is one part of a broader legal strategy.
Your business structure, company documents, partnership arrangements, shareholder agreements, trust arrangements and other legal documents may also be relevant to what happens if you can no longer make decisions.
What should business owners include in their capacity planning?
A useful starting point is to identify the decisions that would need to continue if you were suddenly unavailable.
1. Identify who currently makes the key decisions
Ask yourself:
- Who has authority over the business bank accounts?
- Who can enter into contracts?
- Who manages employees?
- Who communicates with accountants and other advisers?
- Who makes major financial decisions?
- Who has access to important business information?
- Is there anyone else who understands how the business operates?
This can help identify where your business may be overly dependent on one person.
2. Consider who you would trust to step in
Think about who could make appropriate financial decisions if you could not.
This could be a business partner, family member or another trusted person, depending on your circumstances and business structure.
The person you choose should understand the responsibilities involved and be willing and able to take on the role.
3. Put the appropriate legal documents in place
An EPOA can provide authority for financial decisions if you lose capacity, but the appropriate documents will depend on your circumstances.
Your lawyer can help you consider how your personal estate planning and business arrangements should work together.
4. Make sure the people around you know the plan
Having documents prepared is only part of the process.
Your attorney, business partners and relevant professional advisers may need to know that the documents exist and understand where they can be accessed.
Queensland Government guidance recommends keeping the original EPOA safely and providing certified copies to relevant people, such as your attorney, bank and lawyer.
What can go wrong without a plan?
When a business owner loses capacity without appropriate planning, the people around them may be left trying to work out what they can legally do.
This can create uncertainty at exactly the time when the business needs stability.
If there is no appropriate enduring power of attorney, Queensland Government guidance states that QCAT may need to appoint a guardian or administrator to make decisions on behalf of a person who has lost capacity.
That may mean the person making decisions is not someone the business owner would have chosen themselves.
There can also be practical consequences for the business, particularly where important decisions depend heavily on the owner.
The risk is not necessarily that the business will immediately stop operating. Rather, the issue is that there may be uncertainty about who has the legal authority to make particular decisions and how those decisions should be made.
Planning ahead gives you the opportunity to make those decisions while you still have capacity.
A simple process for planning for business incapacity
Capacity planning does not need to be complicated.
A useful process is:
Step 1: Identify the risk
Consider what would happen to your business if you could not make decisions tomorrow.
Step 2: Identify the decision-makers
Work out which decisions currently depend on you and who could potentially step in.
Step 3: Review your business structure
Consider whether your company, partnership, trust or other business arrangements create additional considerations.
Step 4: Review your estate planning
Consider your EPOA alongside your will and other estate planning documents.
Step 5: Document your wishes
Make sure the people you trust understand how you would want important matters handled.
Step 6: Review regularly
Your circumstances, business and relationships can change. Your legal documents should be reviewed when there are significant changes.
Frequently asked questions
What happens to a business if the owner loses capacity?
It depends on the business structure and the legal arrangements already in place. If the owner is responsible for important financial decisions and nobody else has appropriate authority, the business may face uncertainty about who can make those decisions.
Can an enduring power of attorney cover a business?
In Queensland, financial matters under an enduring power of attorney can include carrying on a business. The document can also specify or limit the powers given to an attorney.
Does a general power of attorney continue if I lose capacity?
No. A general power of attorney ends if you lose capacity to make financial decisions. An enduring power of attorney is designed to continue in circumstances where you lose capacity, subject to its terms.
Who should I appoint as my attorney?
You should choose someone you trust who is capable of taking on the responsibilities involved. Queensland Government guidance recommends thinking carefully about who you appoint and discussing your wishes and preferences with them before making an enduring power of attorney.
Do I need more than an enduring power of attorney for my business?
Possibly. An EPOA is one part of capacity planning. Depending on your circumstances, your business structure, company or partnership arrangements and other legal documents may also need to be considered.
Planning for the unexpected
Most business owners spend their time planning for growth, not for the possibility that they may suddenly be unable to make decisions.
But business continuity is not only about what happens when you leave the business. It is also about what happens if you temporarily or permanently cannot make decisions yourself.
Putting the right legal arrangements in place while you have capacity can give you greater control over who steps in, what authority they have and how your affairs are managed.
At Fulljames Law, we can help you look at your personal estate planning and business arrangements together, so your legal plan reflects the bigger picture.
If you own a business, now is a good time to ask: if I couldn’t make decisions tomorrow, who would be able to keep things moving?
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Disclaimer
This article provides general information only and does not constitute legal advice. Every business and personal situation is different. If you are concerned about what would happen to your business if you lost capacity, we recommend obtaining legal advice about your individual circumstances.