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Understanding the risks of POAs for family businesses

On Behalf of | Jun 4, 2024 | Estate Planning |

Managing a family business is fulfilling, but it is a complex task. As you grow older, you might worry about who will manage it when you are no longer able to do so. This is where a durable power of attorney (POA) comes in. This legal document grants an individual the authority to act on your behalf in various matters, including financial and operational decisions. However, it is crucial to understand the risks and implement safeguards to protect your interests.

Potential drawbacks of a POA for a family business

A POA can be a valuable tool for managing business affairs when you become incapacitated. However, it is not without its risks:

  • Misuse of authority: Your appointed agent may misuse their power, acting in their own interest rather than the business’s best interest.
  • Family disputes: A POA can often lead to family disputes, especially if not all members agree with the appointed agent or their decisions.

Granting a POA to the wrong person can have severe consequences; it could lead to financial abuse, unauthorized transactions or even identity theft.

Safeguards to mitigate risks associated with POA

To protect your business from the potential risks of POA, it is crucial to implement precautions. Here are three strategies to consider:

  • Choose the right agent: Appoint someone trustworthy, competent and who understands your business’s best interests. This could be a family member, a business partner or even a professional adviser.
  • Clearly define powers: Clearly outline the agent’s powers and limitations. This can help ensure that they only act within the scope of their authority.
  • Implement checks and balances: Require your agent to provide regular financial reports and have a trusted third party review their actions.

You can also specify other restrictions or rules in the POA document. For instance, you can set a timeline for when your agent will manage your family business.

While a POA is beneficial for managing family businesses, it carries potential risks. Understanding these risks and implementing the right safeguards can protect your business and its interests. If you are facing complex POA issues, it could be beneficial to seek the help of a legal professional. They can help draft a comprehensive POA document, guide you in selecting the right agent, and provide strategies to mitigate potential risks.