Effect of Personal Guarantees
Personal Guarantees Limit Corporate Protection
Anyone doing business with a corporation may require that the principal of the company give a personal guarantee of a corporate obligation. In simple terms, the person signing a guarantee promises to pay the corporation’s debts if the corporation is unable to do so. For example, if you wish to lease office or retail space for the business, the landlord may request a personal guarantee of the lease obligation. If the corporation fails to make its payments on time, the landlord can then collect directly from you. In this manner, a personal guarantee eliminates the benefits of the corporation’s limited liability.
Similarly, vendors sometimes will not sell, and banks and other lenders often will not lend to a family corporation without a personal guarantee. To the extent that guarantees are provided, an individual owner will have personal liability for these contracts, and the corporation will not provide protection from these obligations.