What happens to a business when its owner loses mental capacity? 

Business owners spend years building resilience into their businesses. They insure against fire, flood and cyber incidents, negotiate protections into contracts and leases, and plan for economic uncertainty. Far fewer plan for what would happen if they themselves were suddenly unable to make decisions. 

Yet the loss of mental capacity by a director, shareholder, partner or sole trader can be one of the most disruptive events a business faces. It may happen suddenly, following an accident, stroke or serious illness, or develop gradually through a condition such as dementia. Unlike death, where established legal processes take over, loss of capacity can leave a business owner very much alive and still owning their assets and business interests, but unable to exercise the rights attached to them. Family members, fellow directors and business partners do not automatically acquire authority to act simply because someone has lost capacity, and without the right arrangements already in place, even routine decisions such as paying suppliers or exercising shareholder rights can become significantly more complicated. 

What losing mental capacity actually means 

Mental capacity is not all-or-nothing. Under the Mental Capacity Act 2005, a person is assumed to have capacity unless established otherwise, and capacity is decision-specific. Somebody may be capable of making one decision but not another, and their capacity can fluctuate over time. 

The relevant question is not whether someone has a particular diagnosis, but whether, at the time a decision needs to be made, they can understand, retain, use or weigh the relevant information and communicate a decision. That is a genuine challenge in a business context, where decisions range from routine matters to complex, high-value transactions and speed often matters. Businesses should avoid making assumptions about an individual’s capacity and, where concerns arise, the position should be considered carefully with proper medical and legal advice. Just as importantly, planning should not wait until capacity has become uncertain. Many of the arrangements that can make the greatest difference need to be put in place while the business owner is still able to make those decisions for themselves. 

Sole traders 

For a sole trader, there is no separate legal entity standing between the individual and the business, which makes incapacity particularly significant. Nobody else can simply take over because they are a spouse, child or trusted colleague, and difficulties can arise quickly around bank accounts, wages, contracts, leases, debts and tax decisions. The business itself may be perfectly viable. The problem is that the person legally entitled to make its decisions may no longer be able to do so. A Lasting Power of Attorney, or LPA, allows someone to appoint one or more trusted people, known as attorneys, to make decisions on their behalf if they later lose capacity, and it must be made while the person creating it still has capacity to do so. There are two types, one covering property and financial affairs and the other covering health and welfare, and for a sole trader, a properly prepared Property and Financial Affairs LPA, with appropriate provision for the owner’s business affairs, can be a particularly important part of continuity planning. 

Partnerships 

For partnerships, the starting point is the partnership agreement. A well-drafted agreement can anticipate incapacity, addressing management and voting arrangements, entitlement to profits, and how a partner’s interest should be valued or exited. Problems tend to arise where the agreement is old, incomplete, or simply doesn’t exist, leaving remaining partners facing difficult questions about what they can still decide and what happens to the incapacitated partner’s economic interest at exactly the moment they need certainty. 

That uncertainty can quickly become a commercial problem if important decisions cannot be taken, money cannot be dealt with as intended, or the remaining partners have no clear mechanism for managing the affected partner’s interest. The answer is to establish the rules before they are needed. A partnership agreement should deal expressly with incapacity, while a partner’s own Property and Financial Affairs LPA may give a chosen attorney authority to deal with their financial interest in the business. That does not necessarily give the attorney the same rights as the partner to participate in the management of the partnership, which is why the two arrangements need to be reviewed together, so the business’s constitutional arrangements and the individual’s personal planning support each other rather than pulling in different directions. 

Company directors 

A limited company is a separate legal person, so it continues to exist if a director loses capacity, but that doesn’t make the practical consequences straightforward. A director’s appointment is personal, and an attorney under an LPA does not simply become a director in their place. This is where the company’s articles of association matter. Under the Model Articles for private companies limited by shares, a director’s office is automatically vacated once a registered medical practitioner treating them gives a written opinion confirming incapacity likely to last more than three months, though bespoke or older articles may say something different, so the governing documents need to be checked carefully. 

Removing a director is only part of the issue. The more important question is usually who can run the company afterwards. If there are several directors and the board remains quorate, disruption may be limited. Where one person was central to management, or was the only director, the disruption is considerably more serious. A company that cannot constitute an effective board may struggle to make the decisions needed to keep operating, from approving transactions and dealing with banking arrangements to responding to an urgent commercial issue. Reviewing the articles and the composition of the board before incapacity occurs can expose those vulnerabilities and, where appropriate, allow alternative arrangements to be put in place. 

The sole director and sole shareholder problem 

Owner-managed companies often concentrate management and ownership in one person, who is both sole director and sole shareholder. If that person loses capacity, two distinct roles need to be untangled: their authority as a director, which comes from company law and the company’s constitution, and their rights as a shareholder, which come from their ownership of the shares. 

An LPA cannot transfer the office of director, but a suitably drafted Property and Financial Affairs LPA may, subject to its terms and the company’s articles, allow an attorney to exercise the rights attached to the shares, which can in turn provide a route to appointing a new director and restoring effective management. That is why an LPA for a business owner should not be prepared without understanding the company sitting behind it. If the attorney’s authority, the shareholder’s rights and the company’s articles have been considered together in advance, there may be a clear route for putting effective management back in place. 

This is exactly the kind of situation where documents drafted separately from one another can leave an unexpected gap. Without that coordination, the company could find itself unable to operate its bank accounts or approve a transaction until the position is resolved. Where those documents don’t work together, or no appropriate LPA exists, court involvement may become necessary, whether through an application under the Companies Act 2006 for directions about holding a meeting, or an application to the Court of Protection for a deputy. What could have been resolved quickly with the right planning in place can become a considerably longer and more expensive process. 

Why a Lasting Power of Attorney matters to business owners 

For business continuity purposes, it is the Property and Financial Affairs LPA that is particularly relevant. The real question is not simply whether one exists, but whether it actually works for the business. The person somebody trusts with household finances is not necessarily who they would choose to make decisions involving employees, commercial property or a valuable shareholding. Where appropriate, some business owners therefore choose to separate personal and business affairs into two Property and Financial Affairs LPAs, carefully scoped so the attorneys’ authority does not overlap, allowing a commercially experienced attorney to handle business matters while family members manage personal finances. This needs careful drafting so both LPAs stay compatible with each other and with any partnership agreement, shareholders’ agreement or articles already in place. 

The Health and Welfare LPA does something different, allowing chosen attorneys to make decisions about care, accommodation and medical treatment, including, depending on the authority granted, life-sustaining treatment, once the individual can no longer decide for themselves. It gives no authority to run a business, but is worth putting in place alongside the financial document, since a serious accident or illness can create urgent welfare decisions and business questions at the same time. 

What happens without an LPA 

Where capacity has already been lost without the right authority in place, it may be necessary to apply to the Court of Protection for a deputy to make specified decisions on the person’s behalf. Deputyship works very differently from an LPA. With an LPA, the individual chooses their attorneys and their authority in advance. With deputyship, the court becomes involved only after capacity is lost, and decides whether an appointment is appropriate and what powers to grant, with the process requiring medical evidence, ongoing court oversight, and usually continuing reporting duties to the Office of the Public Guardian. Urgent or interim applications are sometimes available, but they add cost and delay at an already stressful time and are no substitute for planning done in advance. 

Capacity planning and succession go hand in hand 

Incapacity planning should not sit apart from a business owner’s wider succession and estate planning, since an effective plan has to cover both what happens during the owner’s lifetime if they cannot act, and what happens after their death. A Will should reflect the owner’s current business interests and be reviewed alongside the documents governing the business itself, considering who should inherit shares or partnership interests, whether that is consistent with the articles or any shareholders’ or partnership agreement, and whether a mechanism exists for other owners to acquire that interest and for it to be valued and funded. These questions cross traditional legal specialisms more often than owners expect. A straightforward instruction to prepare an LPA can expose a weakness in a company’s articles, while a review of a shareholders’ agreement can reveal that an owner’s personal succession arrangements no longer say what the agreement assumes. That overlap is precisely why capacity planning for business owners works best when the individual and the business are considered together. 

Planning for continuity 

Nobody can remove every risk associated with serious illness or incapacity, but owners can find out, before it matters, whether their business would still be capable of making decisions without them. That means asking who would actually have legal authority to act tomorrow, whether the governing documents deal with incapacity at all, whether an existing LPA genuinely reflects the complexity of the owner’s business role, and whether the LPAs, Will, articles and any shareholders’ or partnership agreements have ever been looked at together. Businesses change, and documents prepared even a few years ago may no longer do what the owner assumes they do. 

The right solution is rarely a single document. It is more likely to combine a carefully drafted Property and Financial Affairs LPA with company articles or a partnership agreement that properly address incapacity, a current Will and a wider succession plan, sometimes with personal and business attorneys deliberately kept separate. What matters most is that these arrangements are designed to work together. 

Coodes’ Private Client and Corporate & Commercial teams work together to help business owners consider both sides of that planning: what would happen to the individual and their assets if they lost capacity, and what would happen to the business without them able to make decisions. Putting the right arrangements in place now can provide considerably greater certainty for the owner, their family and the people who may one day have to keep the business moving without them. 

About the Authors 

Kirsty Davey is Head of Corporate and Commercial at Coodes, leading a team that advises businesses across a wide range of sectors including manufacturing, technology, retail, tourism and the not-for-profit space. She has extensive experience in corporate transactions, mergers and acquisitions, and complex restructurings, regularly supporting clients on high-value deals, succession planning and growth strategies. Alongside her technical expertise, Kirsty is actively involved in the South West business community, currently chairing the Grants Panel for Cornwall Community Foundation and serving as an Enterprise Advisor to Penryn College. She is also a past President of the Cornwall Law Society. 

Sarah Cornish leads the Private Client team at Coodes Solicitors and is a member of the firm’s Executive Board. Qualifying in 2007, she has built extensive experience in Wills, trusts, estate administration and tax planning, helping individuals and families protect and preserve wealth across generations. Sarah is a full member of STEP, a Fellow of the Agricultural Law Association and an accredited member of the Association of Lifetime Lawyers, and also acts as a professional Attorney and Deputy.