Let’s talk about the pointy end of running a business – the stuff we usually put off until we can’t: contingency planning.
Consider: what happens when you become ill or incapacitated, or die, as a sole trader, partner, or company director?
The answer is different for each business structure, not to mention obligations with self-managed superannuation funds.
The basic rule
Let’s start with the basic rule: if you are a business operator, you must have an alternate person appointed to deal with your business and its relationships when you can’t.
Without formal appointment, in many cases, that person isn’t just your spouse or next of kin.
Proper written authority
The law requires you to give proper authority to the person you trust to run your business. Many will think that a spouse or next of kin with a standard power of attorney will cover the issues. This is not entirely correct.
You will need to check what each bank, supplier and creditor would require to interact with others in those circumstances. Even lawyers sometimes have difficulty getting a creditor to talk with us because the creditor is concerned about privacy laws, so it’s best to ensure you’re across their individual requirements.
General Power of Attorney
Your general power of attorney should be tailored to take effect when certain events arise. Which events are those? Well, you can choose. And, like general estate planning, you should choose at least 2 people to act when you cannot.
Can they be the same person as with your general estate planning? That will depend on whether your general attorneys have the commercial acumen your business requires. Choosing your attorneys doesn’t just mean appointing them.
Acting as an attorney is quite involved and legally has multiple duties. And, appointing an attorney gives them the power to control your legal and financial affairs, within the limits you set.
Ask the person whom you would like to act for you and give them time to consider it. Understand they can require you to reimburse their expenses, and – if you wish – an agreement may be reached for a wage/salary for the time they act on your behalf.
The best tip is to choose someone who will do what you would want and who will consider your needs in any situation. That’s what the law requires, so there’s no point in appointing someone who will:
- be controlled or manipulated by others
- not do the job well including ensuring proper record keeping for your business and in their role as an attorney
- act only for financial gain
- misuse their power
- fail to take professional advice when its required
- not know when they’re in over their head
- work with any other attorneys that you appoint
As a sole trader, you run your show. Liability sits with you personally as do the profits. You might have employees, you might not.
Aside from appointing a person (or two or more) that you trust as your attorney, you will need to ensure you have a procedures/policy manual so that your attorney can readily review the business and quickly understand what comes next.
That manual should also provide a mechanism to communicate key websites and passwords to your attorney. There are cybersecure ways to convey this information and if you are not already across those, your best interests are in immediately learning about multifactor authentication and password storing programs.
Of course, a partnership is 2 or more persons running a business with a common view to profit. Ownership and liability are joint and several, with the partners having extensive formal duties to each other and the partnership overall.
Profits are split according to the written partnership agreement (yes, there really should be a considered document that governs your relationships). Your partnership agreement will need to be reviewed when your Power of Attorney is written as there is no use in having an attorney who is hamstrung by inconsistency with your partnership documents.
What happens for and what is required of your attorney will depend on the size of the partnership, and the nature of the business.
Note that the numbers for maximum sizes of partnerships varies across the states and territories in Australia. This means your attorney could be dealing with 19 partners across half of the country. Practical issues like this are something to consider when choosing your attorneys.
For a small partnership of a few partners, it may be easy for the attorney to call a partnership meeting and inform the partners about the next steps. The best outcome will occur if you have already informed your partners about your contingency planning and whom to expect if the contingency event is triggered.
The complexity and size of the partnership and the relative sophistication of your attorney will govern the extent of advice your attorney requires. A duty exists in law for attorneys to take professional advice when needed and have the expense met by you.
As a company director, you will appreciate that you and the company are separate legal beings. Just as you have a date of birth, the date the company was created is its date of birth.
You are the controlling mind and will of the company, and action the company’s decisions about its assets, income, strategy, and liabilities.
Regardless of whether you are the only director or one of many, or the only shareholder or one of several, the duties of a company director are extensive. While an accountant may tell you that a company is a good idea because it limits your exposure to tax and legal liability, that protection will depend on how the company has been conducting its affairs. The risks of being a company director are substantial having both civil and criminal penalties, and requiring regular engagement with the business to ensure you are meeting those duties.
Your company will have founding documents: a constitution and rules of incorporation (or the replaceable rules). There will be records for minutes of regular meetings held by the company that note the decisions taken by the company. Those documents interact and, to some extent, determine what will happen if you become ill, incapacitated, or die. Equally, the documents identify what is required to appoint your attorney and required of your attorney by the company when acting in your stead.
Of course, the more sophisticated your business structure, the more extensive duties you will owe to others and the more extensive duties your attorney will need to fulfil.
What is a sophisticated business structure? Anything involving:
- a trading, discretionary, family, unit, or hybrid trust
- shareholders that are companies or trusts
Self managed superannuation funds
Historically, coal miners walked a caged bird into a pit to determine if it was safe to continue to work.
In today’s economy, when facing illness or incapacity, self managed superannuation funds are a little like a coal mine: great when the bird keeps tweeting, challenging when things go awry.
Many self managed superannuants are relatively sophisticated in their commercial dealings because they are generally making decisions about their life savings. However, even if they have appointed an advisor to manage the fund, many still won’t know what happens if one of the fund’s trustees becomes ill, or is incapacitated.
Wherever the superannuant is a director of the trustee company for the superannuation fund, the attorney appointed will likely need to deal with the self-managed superannuation fund.
To do so, the superannuation fund trust deed, the trustee company constitution and rules of incorporation will need to be reviewed to ensure there is no inconsistency and the attorney’s acts are valid for those structures.
The review of those documents will need to occur when your Power of Attorney documents are being written. It’s always better to iron out any foreseeable difficulties than simply weather the storm if you become ill or incapacitated.
Some practical issues
Licensing and industry requirements will impact your decision when appointing an attorney to act in your stead. From plumbing to auditing, and beyond, the regulations’ requirements for industry and business grows. Some fields require formal appointment by a Court or regulatory body and will not permit anyone to act as an attorney on your behalf without that registration.
If you fall into one or more of these sectors, thankfully you will be across the requirements and can put this into your considerations about whom is best to support your business when you can’t.
Death, politics, religion, and taxes
You might have noticed that so far, there’s been little talk of death in this piece – even though the article opens with discussion about what happens in those circumstances. Of course, given we are discussing the law, the answer is: it depends.
If you have sound estate planning in place with a power of attorney, advance care decision making, and a will that caters for your family and your assets, there’s someone (or two) in your life already appointed to notify others about your death and to take steps to protect the estate.
If you are like many Australians, who really don’t talk about death, just like we don’t talk about politics, religion, and our personal taxes, you are yet to arrange your affairs.
Without an estate plan, you leave the responsibility of learning about your business, debt, and agreements to your spouse. Legally, that’s who is your next of kin. The law then decides what is to be given to whom in set proportions, and your spouse will need to make an expensive application to Court to deal with your property and finalise your finances (including those taxes).
When emotions are high, adding cost, delay and complication to what are otherwise routine processes can be avoided with good planning.
Why does contingency planning matter now?
Successful business happens through a combination of a lot of hard work, a little good fortune, timing, and a bucket load of planning.
Making contingency planning a priority now will help you manage the ups and downs of our strained economic cycle. Should you become unwell for an extended period, you, your business, and your business relationships will be protected by your savvy business planning in connection with solid risk-averse legal advice.