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Building a business takes years of effort. Protecting it properly takes far less time. Yet most business owners do one without ever doing the other.
The conversation about what happens if you become ill, incapacitated, or die is one most people avoid. Edith Woodward, Associate Director at Carthy Accountants, hears this regularly. The reason is almost always the same: thinking about these scenarios is uncomfortable, so the planning never happens.
As Edith makes clear, the cost of not having a plan is higher than the cost of making one. This is Part 1 of a two-part series. Here, Michael and Edith cover the personal protection side: insurance, lasting power of attorney, and a risk most limited company directors have never been told about.
TL;DR
If you are short on time, here are the five things this article covers.
1. Being the only director of your limited company is a legal and financial risk most owners have never been told about. If something happens to you and there is no other director in place, no one has the legal authority to access the business bank account, pay employees, or keep the company running.
2. Adding a second director or company secretary resolves this immediately.
3. Beyond that, key person insurance protects the business financially if you cannot work. Relevant life insurance is a policy your limited company can pay for directly, which makes it more tax-efficient than personal cover.
4. A lasting power of attorney can include your business. There is also a separate business LPA that most owners have never heard of.
5. All of these are straightforward to put in place. None of them work if they are only in your head.
If you run a limited company on your own and you are the only director, do you know what happens to that company if you die or become incapacitated? The answer is more alarming than most business owners expect.
There is a term for what most business owners represent in their own company. A single point of failure. Everything depends on them. Take them out of the picture and the business has a serious problem.
Edith sees this pattern consistently. Owners know the what-ifs exist. They just find it easier not to think about them. The result is businesses that are far more exposed than they need to be.
Putting plans in place does not require dwelling on worst-case scenarios. Rather, it takes a practical conversation with the right people, a few documents, and a decision or two. The businesses that do this sleep better. So do their families.
Key person insurance
Key person insurance protects a business financially if the person most critical to its operation cannot work. For owner-managed businesses, that person is usually the owner.
Without this cover, an unexpected illness or death can leave the business unable to meet its obligations. With it, there is a financial buffer. The business can continue paying staff, meeting contracts, and working through the disruption.
For small businesses where the owner generates most of the income, this cover is not optional. Think of it as the insurance that determines whether the business survives at all.
Relevant life insurance
Relevant life insurance works differently from standard life cover. A limited company pays the premium directly as a business expense. That makes it more tax-efficient than paying for life cover from personal income after tax.
Most directors do not know this option exists. Those who do almost always take it up. The protection is the same. The cost, after tax, is lower.
A lasting power of attorney (LPA) can cover personal finances and health decisions. What most people do not know is that a personal financial LPA can also include explicit instructions about the business.
Those instructions can specify who has authority to act on your behalf, how you want the business run, and who takes decisions if you become unable to make them. Including this detail in the LPA removes significant uncertainty at an already difficult time.
Beyond that, a separate business LPA also exists. This document covers the management and continuation of a business specifically. Without one, it can be legally unclear who has authority to act on behalf of the company when the owner cannot.
Talk to a solicitor about both options. Getting these in place is straightforward. Discovering they are missing when they are needed is not.
Here is the fact that tends to stop people mid-conversation.
If you are the only director of your limited company and you die or become incapacitated, nobody else has the legal authority to run it. No one can access the bank account. No one can pay employees. No one can fulfil contractual obligations.
In serious cases, where no succession arrangements exist, the company can end up in probate. Assets may effectively pass to the state.
The fix is simple. Add a second director or a company secretary. That person then has legal authority to act on behalf of the company if you cannot. One decision, made now, can make the difference between a business that survives and one that does not.
Even with that change made, the business still needs a clear plan. Who contacts clients? Who manages the team? Who takes the decisions? Write down the answers. Share them with the right people. Do not leave them in your head.
Protecting a business properly does not have to be complicated. Review your insurance. Look into a lasting power of attorney. Add a second director. Get the what-if plan in writing.
Each of those steps is manageable. Together, they mean the business you have built has a genuine chance of continuing if something unexpected happens.
Part 2 of this conversation covers shareholders agreements, succession planning, and the professional team you need to make sure everything works together. Link below once published.
In the meantime, if you would like to talk through what protecting your business looks like in practice, get in touch.
Get in touch: carthyaccountants.co.uk/contact
A short conversation now can protect everything you have worked to build.
