How to undermine your corporate liability protection with Personal Guarantees
What are Personal Guarantees and Why on Earth would anybody sign one? A Personal Guarantees is a promise to pay corporate debt if the corporation is unable to do so. A personal guarantee can eliminate a primary benefit of a corporation, in that the individual owner can be exposed to full personal liability.
Personal guarantees commonly arise in corporate transactions. For example, most commercial landlords require a personal guarantee from their business tenants. The business itself might be the tenant (e.g. the LLC is the actual leaseholder), yet the business’s owner will be required to sign the personal guarantee. In this hypothetical, the business’s owner would be liable to the landlord in the event the business defaulted under the commercial lease.
It seems obviously counterintuitive to sign a personal guarantee. Exposure to liability is negative, risky, and without apparent benefit. So why would anyone go to the trouble of forming a business only to jeopardize the protection by signing a personal guarantee? In four words: because they have to.
The advantage of a personal guarantee (is there an advantage?!)
Personal guarantees are ubiquitous in the commercial world. Lenders typically require them, landlords do, and often so too do vendors. Personal guarantees are usually required and are a prerequisite to advancing your business interests. They are so common that it is uncommon not to have to sign one. Make sense? So, in short, the advantage of a personal guarantee is that you might be able to acquire a loan that you wouldn’t otherwise. Or, acquire a lease that you wouldn’t otherwise. Or, product to sell… and so on and so forth.
Can Personal Guarantees be negotiated?
The answer is “Yes” and “It Depends”. Negotiations are all about bargaining position. Some negotiation positions are stronger than others. For example, a competitive commercial leasing environment might not afford a first-time business owner the advantage of negotiating the personal guarantee.
A couple of areas that can be negotiated include the spousal guarantee. Frequently personal guarantees are sought against a business owner’s spouse, even if such person is not involved with the business. Other potentially negotiable areas include the term of the guarantee and the financial limit of the guarantee. An experienced business attorney can assist with this negotiation.
Attorney Craig Morgan is a member of Metrolina Real Estate Investors Association, www.MetrolinaREIA.com, which provides education, networking, and mentoring to investors in the Greater Charlotte area. He can be reached at Craig@providencelawcarolina.com, (www.providencelawcarolina.com).