Have you thought about what would happen to your business if you became disabled or were away for an extended period of time? Who would sign payroll checks (if you don’t already make payments electronically)? Who would submit tax returns? Who could approve new vendor contracts? These and many other routine functions of a business owner may be left undone and, in the long run, essentially undo the business. The preventive action to take to avoid disaster is having a power of attorney (POA) authorizing an agent to act. The party granting the POA is the principal; the person named to act on behalf of the principal is the agent.
Key points to consider:
What the Power of Attorney (POA) can do
For purposes of a business, a power of attorney (POA) can authorize an agent to manage:
- Banking transactions
- File returns
- Manage business affairs (e.g., renew a lease; hire and fire employees; engage new vendors)
- Sign contracts
Type of POA. Be sure the POA is durable, which means it is effective even if you are incapacitated. A regular (nondurable) POA cannot be used if you become incapacitated.
Best practices for a POA
Your document should clearly identify who is granting the authority to act. Is it the owner personally to manage the individual’s assets, health, and business matters, or is it the business entity giving authority solely for business matters. The personal POA is fine if your business is a sole proprietorship since there is no legal separation for personal and business matters and can deal with it all. But if you have a corporation or LLC, a business POA is the solution. The business POA operates exclusively on behalf of the business.
Name the initial agent as well as one or more successor agents. If you name 2 agents, be clear about whether each can act separately or must act jointly (i.e., agree to all actions).
The document can define the scope of authority. Examples:
- Assets. Buying and selling property, leasing equipment, signing financing documents.
- Banking and cash management. Signing checks, opening or closing accounts, transferring funds, accessing online banking, obtaining bank balances and other information.
- Contracts. Signing contracts, renewing leases, managing subscriptions, engaging vendors and purchasing inventory.
- Employees. Hiring and terminating employees, approving wage increases, managing employee benefits, signing HR documents.
- Taxes. Signing tax returns, communicating with the IRS and state agencies, receiving confidential tax information, making tax elections, submitting filing extension requests, handling audits.
You may want to place various limitations on the agent’s authority. This could be putting a dollar limit on any business borrowing, barring the sale of the business and any change in ownership, and restricting or barring any change in compensation.
You can require the agent to keep records and provide reports on his/her activities. Remember, an agent is a fiduciary required to act with trust and pursuant to the needs of you, the principal. There’s a duty of care, duty of loyalty, and a duty to account for every transaction.
Giving your tax pro a POA
In order for the IRS to discuss tax issues with your CPA, you must sign IRS Form 2848, Power of Attorney and Declaration of Representative to give your tax professional a power of attorney (POA). Merely checking the box on your tax return to let the IRS speak to the person who prepared the return is only limited authority to discuss that particular return (e.g., answer IRS questions that arise in the processing of the return, and authorization ends automatically on the due date of the return for the following year). But how can you give this authorization when you’re disabled? It comes back to having a durable POA. When a disability prevents you from signing Form 2848, the agent signs it and POA is attached to the form to show that the agent explicitly has the legal right to sign tax documents.
Final thought
Just like you prepare for a disaster, be sure to prepare for your absence from the business by having a POA. Work with an attorney to make sure the document reflects your wishes and meets legal requirements.
