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Archives for April 2012

Personal guarantees, should you or shouldn’t you?

April 29, 2012 by mrice

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Personal guarantees: should you sign?

Forming a corporation or a limited liability company is one of the smartest things you can do to protect your personal assets. In general, if a company can’t pay its bills, its creditors can’t force the company’s owner to pay its bills — unless the company’s owner has signed a personal guarantee.

Signing a personal guarantee is like co-signing a business loan. A personal guarantee is a legally binding promise to repay a business debt from your own personal funds if your company is unable to pay it. Signing a personal guarantee means that, when it comes to the creditor on the guarantee, you cannot rely on the fact that your business is an LLC or a corporation to avoid paying that creditor. In some ways, a personal guarantee undoes the protections that you put in place when you set up your business as a corporation or an LLC.

If your business defaults on a loan that you personally guaranteed, your personal assets may be at risk. A creditor can sue you personally for the company’s outstanding debt. If you lose, the court can enter judgment against you personally, and your bank accounts — even joint accounts — may be levied, your wages may be garnished and your property may be seized. Retirement accounts, Social Security income and disability income are usually safe, but other assets are not.

A personal guarantee is so risky, you may wonder why any small business owner would sign one. The answer is simple: many lenders require them. Lenders understand the risks of doing business with a corporation or LLC, so they often require one or more of the major shareholders in a business to personally guarantee a loan, a line of credit or charge account. Small business owners have no choice but to sign a personal guarantee if they need to borrow operating capital or order inventory or other goods on credit.

Small business owners should understand the risks of signing a personal guarantee and make an informed decision before signing. A personal guarantee may be unavoidable if a business owner needs to buy goods or services on credit.

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TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.

 

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