What is a Company Power of Attorney?
A Company Power of Attorney is a legal document put in place by a company to appoint a person, (or persons, or even another company), to act on its behalf if the director loses mental capacity (eg: through sickness or an injury, such as a stroke or a head injury) or dies.
An Australian company has legal capacity and the same rights as a natural person. Its Directors function as the mind of the company and make decisions on its behalf and is said to act through its Directors where Company Directors sign documents and make decisions for the company.
- The Company Power of Attorney (CPOA) provides continuity of company affairs and good stewardship. This is especially important if the directors are sick, missing, or otherwise unable to act. The company loses its ability to act without a functioning director and is then a ship without a rudder.
- This is a particularly important requirement for Sole Directors of a company who may not yet have a Will in place to transfer controlling shares in the business.
In contrast, a human Power of Attorney (POA) (enduring or medical) only appoints humans to act on behalf of another human.
Important: The role of Company Director is one that cannot be gifted to another or transferred through a Will nor can it be exercised under a personal Power of Attorney document.
When to establish a Company Power of Attorney?
- Do you own and operate a business under a company structure?
- Are you the sole director and shareholder of your Pty Ltd. trading or operating company?
- Are you the sole director and shareholder of a company that acts as a Corporate Trustee for a Trust or a Self-Managed Super Fund (SMSF)?
You need a company power of attorney
Under the Corporations Act, a company is allowed to appoint an attorney and it is not necessary to have a specific power in the Company constitution to do so.
When does its need arise?
Depending on your company constitution, a director’s role is usually automatically vacated on a director’s incapacity or death. In these situations, you need to have someone ready and capable of taking control of the company immediately.
- A Director is the decision maker of a company and this role cannot be inherited, gifted, or addressed under a personal Power of Attorney.
- If you're the sole director and shareholder of a private company, you must have a backup plan in place if you lose the mental capacity to continue to make decisions (or even die)
Failing to have a documented plan for this eventuality will leave your company, its financial value, and your family vulnerable.
The Difference between Personal Estate Planning & Business Estate Planning
Personal Modern Estate Planning is about putting legal documents in place today where you nominate ahead of time, a person to act on your behalf later, if you cannot make decisions, due to an unexpected sickness, illness or absence. Business Modern Estate Planning is about building a business continuation plan if the business owner cannot make decisions, due to an unexpected sickness, illness or absence.
Modern Estate Planning for Business is business structure specific so the type of business structure in place determines whether personal estate planning documents or company estate planning documents is needed to build the business continuation plan.
- Sole Traders and Partners are usually seen as one-and-the-same with the business structure. This means their personal control of the business can usually be exercised by others if needed through the use of a Power of Attorney or a Power of Enduring Guardianship document.
- Company Directors are seen as separate-and-distinct from the business ownership. This means the power of a company Directorship cannot be exercised by others or transferred or 'gifted' by a Will, a personal Power of Attorney or Power of Guardianship document.
All these documents are available to be built and purchased through our Sapience Secure Customer Portal with the assistance of your financial adviser.
This is not a decision you can continue to put off
It can cause real distress and financial hardship to your family if you are the sole shareholder or director of your company, and there is no one authorised to direct or manage your business if you lose legal capacity or die.
- While things are being sorted out, the saleable value of your asset may decrease, contracts lost, and competitors are given time and opportunity to take advantage.
- Make sure you have the necessary legal documents in place, so you can maintain your competitive advantage at a time of uncertainty.
Failure to plan for this eventuality can affect the financial viability of your assets and leave your family vulnerable – so, it is something you need to turn your mind to today.
Pro Tip: If a company director dies, does the Company Power of Attorney stop working? No. It does not. A Company Power of Attorney is given by the company, and not by the director. Directors come and go, move on and even pass away. Unlike a personal Power of Attorney, the movement of company directors has no bearing on a Corporate Power of Attorney that continues until revoked.
How we can help
A Company Power of Attorney is an important part of protecting your business and your family, from the business. If you're the sole director and shareholder of a private company, you should have a backup plan in place if you lose the mental capacity to continue to make decisions (or even die)?
- We can supply this legal document.
Contact us for a confidential chat about your needs.
Related: Key Legal Documents for Business Owners
- Non-Disclosure Agreements (NDA)
- Company Power of Attorney (CPO)
- Partnership Agreements
- Shareholders Agreement
- Unitholders Agreement
- Loan to Company Agreement
🏛️ Service Contract Summary
What happens if my business partner suddenly buys a Porsche with company money and then disappears with the partnership's chequebook? (or Why you need a documented Partnership Agreement)
General Partnerships have Unlimited Liabilities
When people make the decision to go into business together, one important yet often overlooked consideration is how best to establish and document the legal relationship between them.
While one of the key benefits of a general business partnership is that it allows the Partners to pool their respective skills and resources (skilled labour, financial resources, business relationships, equipment, etc.) they also need to address how to manage the risks of unlimited personal liability, for the other partners' actions.
What is a Business Partnership Agreement?
A Partnership Agreement is a documented contract between the partners of a business that outlines the agreed terms of the business and how it will operate under two or more people.
When would I need one?
You have a friend or professional colleague. Together, you have a vision so you work together in your new business to make a profit. Congratulations, you are in a partnership. Now that you are in a partnership, you need to document it. If you're looking for a future business partner, understanding the benefits of a documented Partnership Agreement will make you a better future business partner too.
What's in a Partnership Agreement document?
A documented Partnership Agreement is a written contract between the partners that clearly outlines roles, responsibilities, and how the business will be run between two or more people.
A Partnership Agreement deals with:
- financial reporting responsibilities
- agreed to responsibilities of the partners
- each partner’s financial contribution – (called capital contributions)
- an agreed procedure for resolving disputes
- an agreed procedure for ending or resigning from the partnership
- a partner’s share of the business’s tax losses are offset against other personal income (aka the ‘flow through’ effect).
Not having a documented Partnership Agreement is high risk
We all love the simplicity of a partnership. Indeed, many people are in a ‘partnerships’ without their knowledge. But such undocumented partnerships are dangerous.
If you do not document your partnership, you can suffer significant risks and face potential losses because a general partnership carries the risk of joint and several liabilities of you and your partners.
Insight: An undocumented business partnership is dangerous. Missing this step may even disqualify you from participating in a bigger supply chain as many significant businesses reliant on consistent supply, will usually require a capacity statement to confirm a supplier's business stability and continuity is in place, before accepting you as a supplier.
What are the rules if you don't have a written Partnership Agreement in place?
In Australia, each separate state or territory has its own legislation regulating undocumented Partnerships. If you have no written partnership agreement in place, then you have to rely on out-of-date legislation in each state — (and good luck with that).
You can find the different state-based-partnership legislation below;
Advantages of a Partnership Deed
- Simple– when compared to a trust or company
- Cost less to set up – than a company or a trust (where partners are all individuals)
- Inexpensive to run – no ASIC yearly fees like a company
- Less paperwork – no reporting obligations to ASIC
- Easy to understand
- Losses flow straight to the partner – losses are distributed to the partners; in contrast, losses are trapped in a family trust, unit trust, and company
- Low regulation and privacy – companies are over-regulated through the government agency ASIC. Partnerships (like trusts) are less controlled by the government
Disadvantages of a Partnership Deed
- The partners are jointly and severally liable. That means each partner is liable not only for their own share of the partnership debts but also those of all the other partners. Unlimited liability means each partner is liable for the entire partnership’s debts. Let us be very clear: even if a person only had a 10% partner’s share, he or she is responsible for all 100% of the damage arising from the negligence if the other partners do not have the means to pay.
- Unless you are a Partnership of Family Trusts there is no asset protection for each partner.
- Changing of ownership is difficult. It usually requires a new partnership deed to be established. There may be transfer (stamp) duty and Capital Gains Tax (CGT) issues. This is when assets are moved from one partnership to another.
- When a partner dies you have a new partnership so transfer duty and CGT may operate.
Case Study
Partnership Agreements | Jonathan and his 2 brothers' Story
Jonathan and his two brothers are part owners in a truck repair workshop. He is the company's CFO and his brothers manage the business.
One morning Jonathan woke up with an unusual numbness in his arm but simply thought he’s slept on it during the night. Within hours he was in the hospital unable to move or speak. He’d suffered a mild stroke during the evening.
After the initial shock, the uncertainty of this situation soon began to concern his brothers and their families and how this situation would impact their family business. They had recently become guarantors for the business loans and with Jonathan off sick, the future looked precarious.
Doctors said the stroke would need rehabilitation and that he would be unable to drive for the next few months until they had determined the level of his physical and mental impairment.
With Business Risk Protection in place, this is what happened:
- Keyperson insurance cover was in place and immediately paid the company a set amount of money to employ a contract CFO to replace Jonathan.
- Loan protection was in place and paid the company a set amount of money so the business debts were immediately reduced by a third.
- If Jonathan was expected to be off work for the long term, they had an agreement in place about long-term illnesses amongst the owners and how it will be dealt with, and how they would value the business in case the sick owner and their family needed to prepare for an exit from the business.
With an effective plan in place, creditors felt secure that the business was stable and able to continue to trade successfully.
Key Take Away:
If you’re part of a Partnership or in business with other people (especially different family members), you need clarity about these issues and how they will affect you and your family and a documented Partnership Agreement to make it legal.
Frequently Asked Questions about Business Partnership Agreements
What is the difference between a Partnership and a Joint Venture?
Like a Partnership, a Joint Venture is a relationship between two or more parties, but unlike a partnership, each party retains its separate identity.
- A Partnership shares profits or losses between themselves. For example, a profit of $500K was made and now shared (distributed) in proportion to the Partnership Interest.
- A Joint Venture shares output. For example, a successful computer hardware recycling venture was created and as agreed, the rare minerals belong to one party and the plastics belong to another party. The output is shared, not the profits.
A joint venture is often put together for a specific one-off purpose and therefore, unlike a partnership, joint ventures often have a short life and are often focused on short-term, one-off or isolated transactions.
How do I close a Partnership relationship?
Whatever the reason for dissolving a Partnership, a Dissolution of Partnership Agreement must be signed to legally end a partnership and terminate the legal liabilities that all partners were liable for. We can also provide that legal document.
How we can help
Partnership Agreements are an important part of protecting your business and your family, from the business.
- We can supply this legal document.
Contact us for a confidential chat about your needs.
Related: Key Legal Documents for Business Owners
- Non-Disclosure Agreements (NDA)
- Company Power of Attorney (CPO)
- Partnership Agreements
- Shareholders Agreement
- Unitholders Agreement
- Loan to Company Agreement
🏛️ Service Contract Summary
Non Disclosure Agreements — the value of keeping secrets in business is not chicken feed
Have you ever wondered what are the ‘11 Secret Herbs & Spices’ of the Kentucky Fried Chicken (KFC) recipe?
Deeper Dive Article
Do you know the reason why Colonel Harland David Sanders, the American businessman best known as the founder of the international brand KFC, (or just ‘The Colonel’ to his customers), chose not to formally patent the secret signature taste of the brand KFC, but rather used a Non-Disclosure-Disclosure Agreement?
- A Non-Disclosure Agreement (NDA) simply keeps the Colonel's secret recipe, well, secret.
The answer lies in the fact a patent is a publicly registered document of an invention, design, concept or composition that could be used by unscrupulous people to replicate a particular invention, design, concept or composition.
