Sole Business Owners and Catastrophic Illness: What Happens if I Become Disabled and Cannot Run My Business?

Written by:
Norman D. Kallen
Partner
​Brown Moskowitz & Kallen, P.C.

The COVID-19 pandemic brought to light a critical issue for which all small business owners should always have contingency plans: what should a sole business owner do to maintain business continuity in the event the owner becomes ill or otherwise disabled?

Sole proprietors, sole members of LLCs, sole shareholders of a corporation, self-employed individuals and independent contractors often are the only persons in their businesses authorized to conduct certain aspects of business activities on behalf of their entity or themselves. For example, these individuals may have sole authority to handle banking activities (sign checks, etc.), review and approve payment of payroll and accounts payable, review and approve invoices, and oversee policy related to accounts receivable. What if a sole member of an LLC is also the only officer of the company? Who steps into his or her shoes in the event of illness or other disability? Is there a mechanism for temporarily authorizing a trusted advisor, friend or family member to act on the owner’s behalf to handle any or all of the above-described activities?

The best way to provide for these types of circumstances is to plan in advance and prepare an agreement appointing a designated individual to undertake “running the business.”  A power of attorney or a simple signatory authority document from a bank may be too broad or too narrow to meet the owner’s requirements. Moreover, if the business is operated in the form of an LLC or corporation, the only documentation that your bank may have for you to enter into is the authorization of an additional signatory on checks and loan matters. To that end, you may not wish to grant an employee, trusted advisor, friend or family member that authority immediately. Without some sort of agreement in place with either an employee, trusted advisor, friend or family member, you are placed at a disadvantage from a management perspective.

An owner should make a list of tasks that are essential to preserving the business in his or her absence. Next, the owner should very closely consider who he or she trusts to operate the financial aspects of the business.  After these issues are clarified, the owner and the “stand-in” need to come to an agreement in writing regarding the duties, rights, liabilities, indemnification and the commencement or effective date for these duties and a date of termination of the agreement.

The agreement should explicitly set forth:

• The current duties of the business owner that would need to be continued in the event that the owner is unable to carry out those obligations;
• The full and proper legal name of the “stand-in;”
• The “trigger” circumstances under which the agreement will take effect;
• The exact list of undertakings of the “stand-in” which to a large extent would mirror 1. above;
• The grant of authority to the “stand-in” to execute the tasks set forth in the agreement such that a third party, including a bank, would be able to rely on the document as proper authorization for the “stand-in” to act;
• Allocation of risks – liabilities and indemnification; and
• Circumstances under which the business owner terminates the authority of the “stand-in”

Standard terms and conditions would also be included. It is important to have the document notarized, because it will, no doubt, be presented to banks or other institutions that require this formality.
The COVID-19 public health crisis was a wake-up call for all sole business owners and individual business entrepreneurs. The critical point is to consider and plan for illness and disability in any circumstance to ensure the continuity of your business in your absence.

If you would like more guidance, please contact Norman D. Kallen at Brown Moskowitz & Kallen, P.C. at (973) 376-0909, ext. 1114 or via email, nkallen@bmk-law.com