Updated: 5 days ago
The business owner tends to sit firmly at the heart of the strategy, tactics, and structure that defines a small business. As a result of this, the business owner is a central source of advantage (or potentially disadvantage) when executing the operations of the business. Simply put, the success or failure of a small business is inherently tied to the central figure who starts, organizes, and manages it.
What happens when the owner of a successful business must go to the hospital for serious surgery? There is the possibility he or she could be out of action for some time. The business could be at a serious disadvantage resulting from the uncertainty that arises when the owner is unavailable, and no contingency plan is in place. A business power of attorney is an important part of avoiding this potentially damaging situation.
What is a Power of Attorney?
A power of attorney (POA) is a legal document that allows someone, known as the principal, to identify and authorize another person, known as the agent, to take care of legal, medical, and financial matters on their behalf should they be unable to do so themselves. Powers of attorney can confer broad powers on the agent or be more limited and specific.
As a business owner, there may be times that you need to get something done on behalf of the company but can't be there yourself because of other responsibilities or plans. A special or limited power of attorney is a document that allows a particular agent to conduct business on your behalf relating a specific and clearly outlined event, such as opening a bank account, settling a lawsuit, or signing a contract.
More commonly, however, the power of attorney comes into play when someone becomes incapacitated due to a mental or physical disability. A person may be suffering from dementia or in a coma following an accident, making it impossible for them to take care of important financial matters or make decisions for the business. In such cases, the power of attorney could remain in effect for an extended period, or perhaps permanently.
While no one likes to consider a time where they could become incapacitated, having a power of attorney that would take effect should such a situation arise is important because it allows the principal to choose one or more agents that they trust and who have the skills needed to step in and run the business. In Pennsylvania, if someone becomes unable to manage their affairs and they do not have a power of attorney in place, a court may appoint a guardian to handle those business affairs for them – and it may not be the person they would have chosen themselves.
How Does a Power of Attorney Work for a Business?
A power of attorney for your business is important for the following reasons:
Clearly define leadership continuity for your employees. Steady leadership and clear lines of authority are important for any business success. For your employees, its important that they know who is in charge. If there is uncertainty in leadership, it could cause your employees to feel uncertain about their position and future, causing them to look elsewhere for new employment. Finding and retaining talented employees is difficult and expensive for businesses. Having a plan in place will reassure your employees and mitigate the loss of talent.
Verify decision-making authority. It is important when signing loans and contracts that the person signing on behalf of the business has the actual authority to bind the company to the agreement being signed. A power of attorney is a clear statement by a business owner that the person acting as your agent has the authority to sign contracts and loans on behalf of the company. Without this clear statement, banks and other potential contracting parties may hesitate or refuse to enter contracts with your business.
Avoid losing or jeopardizing time-sensitive business opportunities. Opportunities come along and often require quick decisions to capitalize on them. A recent example was the first round of SBA PPP loans. Business owners had to assess the loan terms and apply quickly. Those that did not lost out on the potential funding. Having a power of attorney in place avoids any disruption in the business’ ability to act upon opportunities when they arise.
Conduct transactions with banks and other financial institutions
Buy or sell real estate or different types of property
File and pay taxes
Hire lawyers and need to make decisions for lawsuits
Financial powers of attorney are flexible as to when they start and end as well. They may come into effect the minute they're signed, or they may have set start and end dates prescribed by the principal. In many cases, business owners sign financial power of attorneys over to their spouses when they become incapacitated so that they can have someone they trust managing their finances when they're unable to do so themselves. Even if you sign a financial power of attorney to your spouse, many states require you to become incapacitated before the responsibilities of the power of attorney transfer to your spouse. This specificity ensures that you don't have to worry about your spouse taking control of your finances unless you're unable to.
Do You Need a Business Power of Attorney?
The answer boils down to your business structure and how important it is to have someone at the helm to run it properly. Some questions to ask yourself:
If you become incapacitated, how would the day-to-day operations of your business be disrupted? Who would sign checks and make key decisions?
If you become incapacitated, do you have someone internally who has the capabilities and whom you trust to take over your business?
Is your spouse familiar with your business and capable of running it in your absence?
Do you have one or more business partners, and do you trust them to look out for your business interests and make sure that your family continues to benefit from your ownership?
How do you think your employees would react to the person most likely to take over running your business in your absence? Will they have confidence in that person?
Why a Power of Attorney Isn’t Enough: The Importance of Business Succession Planning
Now that we have covered the importance of a 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.
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 together 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?
Like 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 the information that they will need to hit the ground running. Finally, and perhaps most importantly, make sure they understand your vision and can run the business the way you want it to be run.
The experienced business and estate planning attorneys at Fiffik Law Group can help you review your business and personal situation to help you make the right decision for you for a business power of attorney and succession plan.