Even in an LLC or Corporation, You Are Personally Responsible for Your Business Debt
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Starting a new company or planning on becoming a partner in a new company? Your personal assets are not as protect as you may think. Before starting that new company or joining a partnership, read on to learn how to protect yourself from personal asset exposure now and when you exit the company.
Starting a business can be scary. There’s so much to do – think of a company name, set up the bank account, make a website, the list goes on. Fortunately, setting up your business as a corporation or LLC in Georgia is relatively easy. In fact, you can do the legally-required part online in about 10 minutes. And the best part - incorporating your new business or starting an LLC totally protects and separates you and your personal assets from any business activities, right? Wrong. Incorporating or starting an LLC does not fully protect your assets when it comes to repaying money you borrowed.
In fact, you should figure this out pretty quickly when you apply for a business loan or try to lease office space. Most banks, landlords, and others will require the owner or partners in a company to sign personal guarantees of corporate debt. Why you ask? Because these institutions know that having the company alone sign the contract to repay does not protect their ability to get paid. They want the personal accountability for debt that comes only with tying it to an individual.
This also means that a member or partner leaving your company must realize that he or she is not automatically off the hook for company debt upon departure. We have had been asked to defend several former business partners over the years who were bought out of the company but remained a personal guarantor of company debt. Individuals leaving the company must make sure that all personal guarantees with third party institutions have been handled. Third parties such as banks or landlords do not have to abide by your buyout agreement with your partner(s). Since these guarantees are in the individual’s name, status with the company is of no consequence. The departing individual still must pay.
So now that you know you are personally on the line for money your company owes lenders, here are some tips for how to handle debt safely.
Make sure all partners sign loan, lease, and other important documents – not just you. This helps when you work on number 3, below, because the third party will be more likely to agree to release you from the guarantee or allow for an assignment.
Include debt terms in your operating agreement or by-laws that all members must sign in which they all agree to execute any personal guarantees necessary to obtain company debt.
When exiting a partnership via a buyout, make sure you get the new/current owners to take over the existing debt by way of an indemnity clause. If at all possible, obtain a release of the guarantee or assignment of the guarantee by the third party holding the debt and make sure it is in writing. For example, with landlords, get the landlord to agree to and execute an assignment of the guarantee to a new partner. Certainly a release of the guarantee will be more likely if you have multiple partners remaining with the company that have already executed personal guarantees as well.
Don’t borrow any more than you need. Operate leanly.
ABOUT THE AUTHOR: Theodore Spaulding
Mr. Spaulding is a business trial lawyer and counselor at Boling Rice LLC helping small to mid size businesses in Georgia with their legal needs including trial representation.
Copyright Boling Rice LLC - Google+
More information about Boling Rice LLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
In fact, you should figure this out pretty quickly when you apply for a business loan or try to lease office space. Most banks, landlords, and others will require the owner or partners in a company to sign personal guarantees of corporate debt. Why you ask? Because these institutions know that having the company alone sign the contract to repay does not protect their ability to get paid. They want the personal accountability for debt that comes only with tying it to an individual.
This also means that a member or partner leaving your company must realize that he or she is not automatically off the hook for company debt upon departure. We have had been asked to defend several former business partners over the years who were bought out of the company but remained a personal guarantor of company debt. Individuals leaving the company must make sure that all personal guarantees with third party institutions have been handled. Third parties such as banks or landlords do not have to abide by your buyout agreement with your partner(s). Since these guarantees are in the individual’s name, status with the company is of no consequence. The departing individual still must pay.
So now that you know you are personally on the line for money your company owes lenders, here are some tips for how to handle debt safely.
Make sure all partners sign loan, lease, and other important documents – not just you. This helps when you work on number 3, below, because the third party will be more likely to agree to release you from the guarantee or allow for an assignment.
Include debt terms in your operating agreement or by-laws that all members must sign in which they all agree to execute any personal guarantees necessary to obtain company debt.
When exiting a partnership via a buyout, make sure you get the new/current owners to take over the existing debt by way of an indemnity clause. If at all possible, obtain a release of the guarantee or assignment of the guarantee by the third party holding the debt and make sure it is in writing. For example, with landlords, get the landlord to agree to and execute an assignment of the guarantee to a new partner. Certainly a release of the guarantee will be more likely if you have multiple partners remaining with the company that have already executed personal guarantees as well.
Don’t borrow any more than you need. Operate leanly.
ABOUT THE AUTHOR: Theodore Spaulding
Mr. Spaulding is a business trial lawyer and counselor at Boling Rice LLC helping small to mid size businesses in Georgia with their legal needs including trial representation.
Copyright Boling Rice LLC - Google+
More information about Boling Rice LLC
View all articles published by Boling Rice LLC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
