Personal Guarantees: When A Business Owner Becomes Personally Responsible for a Business’s Debts

Personal Guarantees: When A Business Owner Becomes Personally Responsible for a Business’s Debts

Many business owners form a separate legal entity (an LLC or corporation) when starting a business for the very good reason that they want to avoid personal liability for the obligations of the business. As a practical matter, however, many lenders and commercial landlords require personal guarantees from the owners of small businesses to extend credit or agree to enter into a commercial lease agreement with the business.

A personal guarantee is the promise by an individual to accept responsibility for the obligations of the business – generally the major obligation will be the payment of money – if the business does not meet those obligations. The individual making such a promise is known as the personal guarantor. The terms of guarantees can vary based on how they are written, but often commercial personal guarantees are unconditional, meaning that the party to which the money is owed does not first have to sue the business before seeking payment from the personal guarantor.

The inability of the business to pay its debts when they come due can have immediate negative consequences for the personal guarantor. If you have any questions or concerns about your personal guarantee or your business’s financial health, please do not hesitate to contact Ethan Ganc at ethan@ethanganclegal.com or 212-929-7500.

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