.png)
Personal Guarantees in Michigan: What Business Owners Should Know Before Signing
One reason business owners form corporations and limited liability companies is to separate business obligations from personal assets. However, a personal guarantee significantly changes that protection for a particular debt or contractual obligation.
Personal guarantees appear in many commercial transactions, including leases, loans, equipment financing, supplier agreements, and other business contracts.
Before signing one, a business owner should understand exactly what obligations are being personally guaranteed and how long that guarantee remains in effect.
Sadecki & Associates represents Michigan businesses and business owners in commercial transactions and disputes, including matters involving contracts, commercial real estate, and business obligations.
What Is a Personal Guarantee?
A personal guarantee is an agreement under which an individual agrees to be personally responsible for certain financial obligations of a business.
For example, a landlord leasing property to a newly formed company may require one or more owners to personally guarantee the company’s lease obligations.
If the business later fails to satisfy the guaranteed obligation, the other party may seek recovery from the individual guarantor depending on the terms of the agreement.
Where Do Personal Guarantees Commonly Appear?
Personal guarantees can arise in many areas of business.
Common examples include:
Business loans
Equipment financing
Supplier and vendor agreements
Business acquisition financing
Certain franchise or distribution agreements
The scope of a guarantee can vary significantly. Some guarantees cover a specific obligation or amount, while others may be considerably broader.
Does Forming an LLC Protect You From a Personal Guarantee?
Operating through an LLC or corporation does not necessarily protect an owner from an obligation that the owner has separately agreed to guarantee personally.
The company and the individual owner are generally distinct parties. If an individual signs a valid personal guarantee in addition to the company entering the underlying contract, the guarantee may create a separate obligation for that individual.
For this reason, business owners may benefit from determining exactly what capacity they are signing in and whether the contract contains a separate guarantee.
Are All Personal Guarantees the Same?
No. The specific language matters.
A guarantee may be limited to a particular dollar amount, obligation, or period of time. Other guarantees may be continuing and apply to future obligations arising under the business relationship.
Important provisions may address:
The amount being guaranteed
The duration of the guarantee
Events that trigger liability
Renewal or extension of the underlying agreement
Modification of the underlying contract
Notice requirements
Release of the guarantor
Attorney fees and enforcement costs
These provisions can become particularly important if the business relationship changes over time.
What Happens If the Business Cannot Pay?
If the business defaults on an obligation covered by a personal guarantee, the creditor may attempt to enforce the guarantee against the individual who signed it.
The rights of the parties will depend on the language of the guarantee, the underlying contract, and the circumstances of the alleged default.
A dispute may also arise over the amount owed, whether the guarantee applies to the particular obligation, or whether subsequent changes to the business relationship affected the guarantee.
Can a Personal Guarantee Be Negotiated?
Depending on the transaction and the parties involved, some personal guarantees may be negotiable.
A business owner may seek to limit the amount, duration, or scope of the guarantee. In other situations, the other party may require a particular guarantee as a condition of moving forward.
The important point is that a personal guarantee should not be treated as routine language simply because it appears in a larger commercial contract.
Frequently Asked Questions
Does a personal guarantee make me responsible for every debt of my company?
Not necessarily. The scope of the obligation depends on the language of the guarantee.
Can more than one business owner personally guarantee the same obligation?
Yes. Commercial agreements may include guarantees from multiple owners or other individuals. Their respective obligations depend on the contract language.
Does a personal guarantee automatically end if I leave the company?
Not necessarily. Leaving the business does not automatically mean an existing guarantee has been released. The applicable agreements should be reviewed to determine whether and how the guarantee can end.
Can a personal guarantee be limited?
Potentially. Depending on the transaction, parties may negotiate limitations involving the amount, duration, or obligations covered by a guarantee.
Michigan Business and Commercial Law Representation
Personal guarantees can turn a business obligation into a significant personal financial issue. Understanding the scope of a guarantee before signing can help business owners evaluate the risks associated with a transaction.
Sadecki & Associates represents businesses and business owners throughout Michigan in commercial transactions, contract matters, real estate matters, and business disputes.
If you are considering signing a personal guarantee or are involved in a dispute involving an existing guarantee, contact Sadecki & Associates to discuss the matter with an attorney.
Disclaimer: This blog is provided for general informational purposes only and does not constitute legal advice. Every legal matter is different, and the information provided may not apply to your specific circumstances. For legal advice regarding your individual situation, contact Sadecki & Associates to discuss your matter with an attorney.
Comments