Small Business Owners Beware of the Personal Guaranty
What you need to know when signing a contract.
My apologies for missing last week’s article. To all of my faithful readers (yes, email me so I know you exist), it was one of those weeks where the M.D. took over my J.D. and sentenced me to B.E.D. Luckily, I got an early release.
There are some really exciting articles coming up including mandatory reporting requirements for abuse of children. This piece is influenced by the events that occurred in the Penn State issue. Another great article coming up focuses on the right to bear arms after a felony conviction or a domestic violence injunction. I am going to expand my scope and actually interview some social workers to get their opinions on the topics.
However, this week is much more simple and geared towards our wonderful small businesses. Every business owner should know how to sign a contract so that the business is actually the contracting party. In short, a business should sign every contract as follows:
John Smith, Inc.
By: [sign your name]
Its: [print your position with the company]
This makes it clear that the company is responsible for the contractual obligation and the actual business owner or agent is not personally liable. There are two situations where the other party will try to make you personally responsible for the debt of your company.
The first is where they have you sign the contract directly but intended to sign for the company. For example:
This is a cheap parlor trick that, if you are not careful, can in some circumstances expose you to personal liability. It is used a lot. In fact, the property manager for my office tried this, and I had to write in the signature line correctly. If you intend for the company to take the liability, make sure you sign on behalf of the company.
The other case is where you sign a contract as a corporate representative and then the other party asks you to personally guaranty the contract. Depending on your business credit and the extent of the financial obligation, some parties may require you to personally guaranty the debts of the company. Whether you choose to do that willingly is a business decision.
If you choose to personally guaranty a contract for your business, you need to understand that if your business fails to meet its obligations, you will personally be responsible for the payments. This means that your personal assets will be exposed. Further, if your company does not have a defense for not paying the debt, you as a personal guarantor will not likely have any defenses. A personal guaranty is a tough case to defend if the company itself has defaulted.
I understand that sometimes business credit cannot be issued without a personal guaranty. However, make sure you are willing to put your personal assets at risk before entering that contract.