What Every Business Owner Should Know Before Putting Personal Assets at Risk
One of the biggest misconceptions I hear from business owners is, “I formed an LLC, so my personal assets are protected.”
In many cases, that’s true. One of the primary reasons for forming an LLC is to separate your personal assets from your business liabilities.
But then the business owner signs a personal guarantee.
With one signature, many of the protections they worked so hard to create can be significantly reduced.
What Is a Personal Guarantee?
A personal guarantee is a promise that if your business cannot pay a debt or fulfill an obligation, you will.
Banks frequently require personal guarantees when making loans to small businesses. Landlords often require them before leasing commercial space. Equipment financing companies, vendors, and even some service providers may require one as well.
From the other party’s perspective, it makes sense. Many small businesses don’t have a long credit history or substantial assets. A personal guarantee gives the lender or landlord another source of repayment if the business defaults.
The important thing to understand is that a personal guarantee creates a separate legal obligation. Even if your business is organized as an LLC or corporation, you may still be personally responsible for the guaranteed debt.
Why It Matters
Business owners sometimes assume that because the contract is in the name of the LLC, only the LLC can be sued.
Unfortunately, that isn’t always the case.
If you signed a personal guarantee, the creditor may be able to pursue you personally if the business fails to meet its obligations. Depending on the circumstances, that could put your personal bank accounts, investments, or other non-exempt assets at risk.
That doesn’t mean you should never sign a personal guarantee. It does mean you should understand exactly what you’re agreeing to before you do.
Not All Personal Guarantees Are the Same
Many business owners are surprised to learn that personal guarantees are negotiable.
Some guarantees remain in effect until the debt is paid in full, while others may terminate after certain conditions are met. Some apply only to a specific obligation, while others are written broadly enough to cover future transactions as well.
The scope of the guarantee matters. Before signing, make sure you understand exactly what obligations you are guaranteeing and whether there are opportunities to limit your exposure.
Don’t Assume the Fine Print Is Standard
I’ve reviewed many contracts where the personal guarantee consisted of only a few sentences buried near the end of the document. In other cases, it appeared on a separate page that looked almost identical to the signature page.
It’s easy to focus on the business terms—rent, interest rate, payment amount, or delivery schedule—and overlook the guarantee itself.
Before signing any contract, take the time to identify whether it contains a personal guarantee and understand how it affects your liability.
Can You Negotiate a Personal Guarantee?
Sometimes the answer is yes.
Depending on the transaction, you may be able to negotiate limits on the guarantee, ask that it expire after the business meets certain financial benchmarks, reduce the amount being guaranteed, or remove the guarantee altogether if the business has an established track record.
Not every lender or landlord will agree, but asking the question can be worthwhile.
Protect Your Business—and Yourself
Starting and growing a business often requires taking calculated risks. Signing a personal guarantee may be one of them.
The key is making sure it’s an informed decision rather than an unexpected surprise.
Understanding your obligations before you sign can help you evaluate the risks, negotiate better terms when possible, and avoid discovering later that your personal assets are on the line.
This article is for informational purposes only and does not constitute legal or tax advice. Please seek advice of a licensed attorney before making any legal decisions.
Leigh K. Freeman is a wife, mom and attorney located in The Woodlands, Texas.
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