4.1 Legal Entities and Powers of Attorney

When advising clients, a CeMAP adviser must understand the legal form a client uses to hold assets, run a business, or delegate decisions. The choice of legal entity drives tax, liability, continuity, and how advice can lawfully be given. Equally important is the power of attorney regime, which lets a trusted person act for an adult who has lost, or fears losing, mental capacity.

Business and Personal Legal Entities

Sole Trader (Sole Proprietor)

A sole trader is the simplest form: one individual owns and runs the business under their own name or a trading name.

• No separate legal personality — the trader and the business are the same person in law.
• The owner keeps all profits after tax but bears unlimited personal liability for business debts.
• Setup is cheap: only HMRC notification is required.
• Capital is limited to what the owner can personally contribute or borrow against.

Partnership

A partnership in England & Wales is governed by the Partnership Act 1890: "the relation which subsists between persons carrying on a business in common with a view of profit."

• Two or more partners share profits, losses, and management.
• Each partner is an agent of the firm: an act of one partner in the ordinary course of business binds the firm and all partners (joint and several liability).
• A written partnership agreement is recommended; absent one, the 1890 Act implies default terms (equal profit share, no interest on capital, unanimous consent for new partners).
• Partners are self-employed for tax.

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a hybrid body incorporated under the LLP Act 2000.

• It has separate legal personality, like a company.
• Members are usually agents of the LLP, not of each other.
• Members' personal liability is capped at what they have agreed to contribute — a key advantage for professional firms (lawyers, accountants, actuaries).
• Profits are taxed as self-employed income flowing through to members.

Private Limited Company (Ltd)

A private limited company (Ltd) is incorporated under the Companies Act 2006.

• Separate legal personality — the company owns assets and owes debts; shareholders are not, as a rule, personally liable.
• Limited liability for shareholders: exposure is limited to paid-up share value.
• Shares cannot be offered to the public.
• Run by directors (who owe statutory duties under ss.171–177 of the Companies Act 2006) and owned by shareholders.
• Corporation tax is paid by the company on its profits.

Public Limited Company (PLC)

A public limited company (PLC) can offer shares to the public and may be listed on a recognised investment exchange such as the London Stock Exchange.

• Minimum allotted share capital is £50,000 (a quarter paid up).
• Stricter regulation: a company secretary, audited accounts, stricter director disqualification rules.
• Greater access to capital but heavier disclosure and governance burdens.

Powers of Attorney

A power of attorney (POA) is a formal document by which one person (the donor) authorises another (the attorney) to act on their behalf. Three statutory regimes coexist in England & Wales.

Ordinary Power of Attorney

Created under the Powers of Attorney Act 1971, an ordinary POA is a general or specific authority that the donor grants while still mentally capable.

• Limited to financial and property affairs.
• Lapses automatically if the donor loses mental capacity.
• Suitable for short-term or specific delegations (e.g. whilst abroad for a year).

Lasting Power of Attorney (LPA)

The Lasting Power of Attorney was introduced by the Mental Capacity Act 2005. There are two types:

Key LPA requirements:

• Donor must be 18 and have mental capacity when making the LPA.
• Must be in the prescribed form and registered with the Office of the Public Guardian (OPG) before use.
• A named certificate provider must confirm the donor understands the LPA and is not under pressure.
• Up to four attorneys can be appointed, with rules on whether they act jointly, jointly and severally, or in a mixed arrangement.

The Office of the Public Guardian is the statutory body that registers LPAs, supervises deputies appointed by the Court of Protection, and investigates attorney misconduct.

Enduring Power of Attorney (EPA) — Historic

Enduring Powers of Attorney were created under the Enduring Powers of Attorney Act 1985 and were replaced by LPAs from 1 October 2007.

• Existing valid EPAs made before 1 October 2007 still work but only for property and financial affairs.
• An EPA must be registered with the OPG as soon as the attorney has reason to believe the donor is becoming, or has become, mentally incapable.
• No new EPAs can be created — a client needing capacity-proof authority today must make an LPA.

Capacity Issues

Mental capacity under the Mental Capacity Act 2005 is decision-specific and time-specific: a person may have capacity to choose a small gift but not to sell a house.

A person is assumed to have capacity unless proved otherwise. The two-stage test asks: (1) is there an impairment of, or disturbance in, the functioning of the mind or brain? (2) If so, does it make the person unable to make the specific decision?

Principles governing attorneys and deputies:

• Act in the donor's best interests.
• Consider the donor's past and present wishes, beliefs, and values.
• Choose the least restrictive option.
• Not motivated by the attorney's own welfare.

If no LPA or EPA exists and the adult loses capacity, the Court of Protection may appoint a deputy for property and affairs or, more rarely, for personal welfare.