Business Owners and Personal Guaranty Agreements

By Lane V. Erickson, Idaho Business Law Attorney

As the premier Idaho business law firm our goal is to help you with any and all of your business needs. We want the same thing that you want, which is for your business to be successful and to avoid problems, including legal issues, as you operate your business and move it forward.

For over 70 years, the Racine law office Has helped numerous business clients in the creation, structuring, and operation of their business. We assist our clients in making business deals, entering into business contracts, and making sure that our clients businesses are in compliance with all applicable federal and state laws. We spend time with each clients individually so we can learn what their business needs are. This allows us to work with our business clients to customize how their business is structured and operated so we can help our clients successfully meet their business goals. Our team of Idaho business attorneys include partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Each of the attorneys on our team is skilled, knowledgeable, and experience in assisting clients with all of their business needs.

The purpose of this article is to discuss what a personal guarantee is and how it may affect the operation of your business. This question comes up often with our business clients when they are seeking to enter into a contract to obtain a loan or other kinds of financing or when they are entering into other contracts such as commercial lease agreements. When this happens, the other party often presents our clients with personal guarantee agreement says part of the contract documents.

The best place to start is to describe what a personal guaranty is. A personal guaranty is an agreement by a party who is not part of the main contract where they agree to be personally responsible or liable for the payments that are owed by the primary contracting party. In other words, this type of agreement essentially says that if the primary contracting party defaults or is unable to make the payments they are required to make under the main contract, the person who provides the guaranty will then step in and make those payments personally.

Most often a personal guaranty agreement is a separate written document. It must be written because Idaho law requires that a guaranty be in writing in order to be enforceable. This written agreement usually provides the specific terms and conditions where the party who is signing the guaranty agreement will then be responsible to make payments if the primary contracting party is unable to do so.

It is important to understand that a personal guaranty could be included in a regular loan document rather than being a separate document. So long as it is in writing, it doesn't matter whether it is a separate document or not. For example, if your company was going to sign a lease agreement the main contracting parties are the landlord who is leasing the property and your company who will be the tenant. However, in this lease agreement the landlord may require you to sign as an owner of the company individually guaranteeing payment. In this example, the requirement that the agreement be in writing is satisfied even though it's not a separate document.

When it comes to entering into a personal guarantee the way you have structured your business will also be important. If you have chosen a corporation or an LLC, which is a limited liability company, your whole purpose is to limit the liability of the company so that you are not personally liable for the company's debts or expenses. However, if you are operating as a sole proprietor then there is no corporation that exists to shield you from personally being responsible for the debts of your business. If you are a sole proprietor, that a personal guaranty is really unnecessary.

However, if you are the owner of a corporation or an LLC, this is where the party who is providing the loan or other type of financing to you may require a personal guaranty by you and the other owners of the business.

You may not want to sign a personal guaranty because you may not want to take on the risk of being personally liable for your company’s debts. If this is the case, you are free to negotiate back and forth with the other party concerning whether there will be a guaranty, and if so what the terms and conditions of the guaranty will be.

A guaranty will be enforced based upon the specific language, terms, and conditions that are in the written document. Again, the terms and conditions in the written guaranty are subject to negotiation and can and will be whatever you agree they will be. The most common language that's in a guaranty is a statement that says upon any default by the original borrower, the lender is free to seek payment from any of the liable parties including individuals who have provided a personal guaranty. In other words, if the lender chooses, they can come after the person who provided the personal guaranty first rather than going after the original borrower first.

As we said at the beginning, we have helped numerous business clients work through not only the creation and structure of their business, but also the operation of their business including negotiating contracts and personal guaranty agreements. If you have any questions or concerns about a personal guaranty, we are confident that we can help you too!

Our team of Idaho lawyers can help you with any of your estate planning or probate needs. Whether you are seeking to create or review an estate plan for yourself or would like to help a loved one, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Pocatello 83201. We will answer your questions and help you solve your Idaho business law needs.