As a business owner, it can be difficult to think about relinquishing control over any decisions, much less over every aspect of your day-to-day operations and long-term business strategy. But, for all business owners, there inevitably comes a time when this needs to be done.
So, how do you prepare?
Some people sell out while they are still able to stay in full control. Their business is their retirement plan, and they spend their working life building a company that they can sell when the time is right. Others hang on until the end. Their business is their life and they can’t imagine doing anything else, so they rely on their estate plan to take care of transferring ownership and control.
But, in both scenarios, there is a critical gap that needs to be filled: What happens to the business if something happens to you before you’re ready?
What Business Owners Need to Know about Powers of Attorney
Powers of Attorney: An Overview
For most business owners, this gap is filled with a “power of attorney.” A power of attorney is a legal document that is used to appoint an “agent” to make decisions on your behalf. The name is somewhat misleading because your agent does not provide legal representation, but rather acts on your behalf within the scope of authority granted in the power of attorney.
A power of attorney (also called a “durable power of attorney”) can be very specific in terms of the agent’s authority, and it can contain language that makes it effective only upon the occurrence of a specified event (e.g., the business owner’s incapacity). As a business owner, you want to make sure that your power of attorney is extremely clear in both of these respects. You do not want your agent purporting to make decisions he or she is not authorized to make, and you do not want there to be any question as to whether and when the agent’s decision will be binding.
This last point is critical. Keep in mind the purpose of the power of attorney: To allow someone else to make business decisions for you under extraordinary circumstances. When you power of attorney comes into play, you do not want there to be any questions or confusion that could have been avoided with careful drafting.
What is Considered “Incapacity?”
Generally speaking, business powers of attorney are written to become effective upon the business owner’s incapacity. In legal terms, “incapacity” means the inability to manage one’s own business or personal affairs – whether due to old age, an accident, or an untimely mental illness. However, despite being a legal concept, incapacity is still ultimately decided by a physician (again, generally speaking), and your power of attorney should be clear on the procedures that need to be followed to judge you incapacitated.
What If I Don’t Have a Power of Attorney?
What happens if you become incapacitated and you do not have a power of attorney? In a typical case, your business partners and family members will be put in a very difficult scenario.
As an owner and key executive or board member, your company’s operating agreement or shareholder agreement may require your input in order for any decisions to be made. If you are unable to make these decisions (and no one has been appointed to make them on your behalf), your business partners could be forced to come to a standstill.
Then, there is your family. When someone without a power of attorney becomes incapacitated, there is a legal procedure for appointing someone to act on their behalf. This is known as guardianship. Guardianship laws vary by state, but in any event, the process can be emotionally challenging, time-consuming, and expensive for the family members forced into the position of deciding who should be appointed to make decisions for their loved one. Also, since guardianship proceedings take time, your business could effectively be put on hold for an extended period as a result of your lack of a power of attorney.
Key Tip: Talk to Your Appointed Agent Regularly
When choosing the person to appoint as your business power of attorney, you want to choose someone who (i) you feel confident is able to adequately represent your interests, and (ii) is willing to take on the responsibility. While these types of discussions can be difficult, you should not appoint your agent in a vacuum. Make sure your chosen appointee is up to the task, and then talk to your agent regularly to ensure that he or she is familiar enough with the business and your personal goals to step in effectively, if and when the time comes.
Why a Power of Attorney Isn’t Enough: The Importance of Business Succession Planning
Now that we have extolled the virtues of business powers of attorney, let us be clear: When it comes to planning for the future of your business, a power of attorney isn’t enough. A power of attorney is, by its very nature, a temporary solution.
Whether you goal is to sell or you plan to pass on your business as part of your estate, it is critical to have a business succession plan in place. If you die and leave your business behind, who will take over the day-to-day? Who will own the company? Are they ready and willing to do so right now?
Business succession planning is not an event. It is a process, and it starts with thinking through the issues that you will ultimately address in your succession planning documents (which, incidentally, should go hand-in-hand with your estate plan). These issues include things like:
- Who will own your share of the business? Will it be multiple people (such as your children) or a single individual (such as one child who has shown particular interest in the business)?
- Who will take on your business responsibilities?
- How will you address the tax implications associated with transferring ownership of the business?
- Will the company need to take on new employees in your absence?
- How will you transfer your intellectual capital?
Similar to executing a power of attorney, when you prepare your business succession plan, it will be important to have open communications with your successors. Make sure that they know the business inside and out. Make sure they know how to access your systems and find all of the information that they will need to hit the ground running. Finally, and perhaps most importantly, make sure they understand your vision and are capable of running the business the way you want it to be run.
For more tips on preparing a business succession plan for any type of business, read: Business Succession Planning for Online Business Owners.
Prepare Your Power of Attorney and Get Started with Your Business Succession Plan
If you own a business and do not have a power of attorney or business succession plan, we encourage you to contact us about putting these key mechanisms in place. As an international business and estate planning law firm, we represent business owners worldwide in all matters pertaining to protecting their businesses, preserving their wealth, and preparing for the future. For an initial consultation about your needs, call Jiah Kim & Associates at (646) 389-5065 or contact us online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.