Planning For Business Owner Incapacity
COVID-19 has stunned the country. At the start of 2020, who imagined the dramatic shift the virus would bring to our world, our work, and our daily lives? People find themselves in changing circumstances. Some are on the front lines, caring for those who are ill. Some are home in an effort to slow the progression of the virus. Some are operating or employed in essential businesses, some are unemployed or taking a break until business improves. No matter what the situation, it is a good time to focus on planning.
Incapacity planning is important for everyone, but business owners have unique needs. Having an inadequate plan or no plan can be costly and wreak havoc with the business. What happens if the business owner becomes ill or incapacitated, even temporarily? Are there measures in place to keep the business running and safeguard important assets? The owner should plan for being unable to run the business.
The business owner’s incapacity can be devastating for the business in the absence of a plan for decision-making and control. It doesn’t have to be COVID-19. The owner could experience a sudden medical event, memory loss or dementia, an accident, or mental health crisis. The illness or incapacity of the owner’s spouse or other loved one could diminish the owner’s ability to manage the business. The owner should create the tools and structure for running the business in such event.
1. Decision-making. Who is in charge if the owner isn’t? The owner should choose an agent to handle business decision-making in the event of the owner’s incapacity. It is helpful to choose someone who is already familiar with the business and apprised of its structure and key features. It may involve appointing more than one person to handle separate aspects of the business, including day-to-day decision-making, financial decisions, check-writing, customer relationships, and supervision of employees. Legal documents can define decision-making and control. The nature of the documents depends on the size and form of the company, but in general here are common approaches:
a. Power of Attorney. A Power of Attorney is a legal document naming someone (the “Attorney-in-Fact”) to act for the person making the Power of Attorney (the “Principal”) in specified matters. The Power of Attorney often gives broad authority, but in the business context will usually be limited to actions involving business decision-making. The owner might have a general Power of Attorney authorizing a spouse or other family member to handle personal financial matters, but if the owner is the sole owner and officer of the company, he or she could prepare a Power of Attorney for corporate matters authorizing the corporate Attorney-in-Fact to assume the owner’s decision-making authority. The two Powers of Attorney – general and business-specific – should be carefully coordinated to eliminate the risk of confusion. The Power of Attorney should specify when it is effective: immediately upon it being signed by the Principal? Or only upon the Principal’s incapacity? If only upon incapacity, the Power of Attorney should specify a process for determining whether the Principal is incapacitated. For example, the Power of Attorney could require a statement from a physician who has examined the Principal:
“I shall be deemed incapacitated if a written certificate is obtained from my attending physician, stating that, in the opinion of the physician, I am incapable of managing my property and business affairs due to illness or for any other cause, and that incapacity is likely to continue.”
b. Corporate Resolutions. If the owner isn’t the sole owner and officer of the company, the applicable corporate process should be followed to approve decision-making authority in case of the incapacity of the important officers. This may take the form of Resolutions of the company’s Board of Directors, Shareholders, or Members.
c. Succession Plan. The company can adopt a formal succession plan outlining authority in the event of incapacity or death of the corporate principals.
2. Update Corporate Documents. In the course of running a demanding business, corporate documents can be neglected. Nevertheless, they often control what happens in a crisis.
a. Articles of Incorporation/Articles of Organization. The Articles of Incorporation (corporation) or Articles of Organization (limited liability company) should accurately reflect the important features of the entity, such as its legal name and address. Corporate articles should state the aggregate number of shares the corporation may issue. Other provisions under Minnesota law may be modified only in the Articles, such as how the board of directors may take action without a meeting. These details must be kept current in the Articles.
b. Bylaws/Operating Agreement. The Bylaws, Operating Agreement, or other corporate document outlining how the entity is governed must be consistent with how governance actually occurs. For example, if the Bylaws indicate decisions must be made by the affirmative vote of two-thirds of directors but in Board meetings a majority vote has carried the action, corporate actions may not be valid or be subject to challenge. Similarly in a crisis, the Bylaws are often consulted to determine how officers are appointed or removed. Any inconsistencies between Bylaw provisions and reality should be resolved.
c. Buy-Sell/Member Control Agreement. The business buy-sell or member control agreement among owners often contains terms for transitioning the business in the event of an owner’s incapacity or death. These provisions should be regularly reviewed to ensure they are consistent with the owners’ wishes. Life insurance or other resources to fund a purchase of a deceased or incapacitated owner’s interest should be kept in force, and recalibrated to reflect the value of the company. If no buy-sell or member control agreement is in effect, the best time to discuss these provisions are when all owners are getting along. The worst time to begin negotiating a buyout is when an owner has suffered a medical event or died.
3. External Advisors. The company’s external advisors such as CPAs, attorneys, risk management professionals and financial advisors, can be helpful in identifying areas of risk in the event of the owner’s incapacity. They can advise on the proper structure for ensuring the continuity of the business. The persons named to assume control for the owner should be familiar with these advisors.