mallonbuilding.jpg

Using Personal Guarantees to Reduce Risk of Nonpayment

Aug 23, 2013

By Reed Morris 

In our work preparing contracts or structuring deals for business clients we always discuss securing any obligation to pay.  While the ultimate business decision is made by our clients, we advise them of all options available for securing payment obligations whether the business is a manufacturer, retailer, service provider or financial institution. 

 

How does your business ensure that it will get paid?  The short answer is: you can’t absolutely ensure payment.  However, there are several things business can do to decrease the risk of nonpayment.  Some industry-specific deals provide other means of securing payment, such as payment bonds used in construction or liens on property offered as collateral in commercial lending.  In many other types of business deals a primary means of reducing the risk of nonpayment is through the use of a personal guarantee. 

 

The personal guarantee means that, separate from the business, an individual (usually an owner or owners) signs an agreement that he/she will be personally liable to pay his/her company’s debt should the company default on its obligations. 

 

LLCs and corporations generally do provide their owners with “limited liability” for the business’ obligations, such as business debts. Protecting the business owner from personal liability is one of the reasons business owners form corporations and LLCs.  A personal guarantee steps around that limited liability protection and makes the guarantor personally liable for the business’ obligation.  Many times the individual business owner has significant personal assets, while the actual business (particularly a small business or startup) does not.  In our experience, if a business owner’s personal assets are put at risk, business debts are more likely to get paid

 

Personal guarantees provide multiple avenues for collection.  Both business and personal assets are available to cover the debt obligations.  During collection, for the guarantor, a personal guarantee can be a sobering reminder of what is at stake. Receiving a separate demand letter or being personally named in a lawsuit is often all the additional motivation that is needed for the business (or the guarantor) to pay what is owed.  

 

In drafting such agreements we ensure that the individual guarantor is specifically made a party to the agreement and is personally liable for the business’ debt.  A personal guarantee provision in a contract should clearly state that the sale, loan, or credit being given is expressly conditioned on the existence of the personal guarantee, and that the guarantee is a material part of the consideration or basis for the agreement.  When the agreement is signed, the guarantor (the person providing the guarantee) may actually be signing the agreement twice, once as an individual, and a second time as the authorized representative of the business.  

 

Mallon & Lonnquist, LLC, is a business and real estate law firm. Reed F. Morris is a Colorado business and real estate litigation attorney with Mallon & Lonnquist, based in Denver, Colorado. Reed regularly represents businesses and individuals in business transactions and disputes, from pre-filing through trial, and can be reached at rmorris@mallon-lonnquist.com.  



Category: M&L Legal Posts

Category List


Tag List

American Bar Association (2)
Business Contracts (1)
Corporate Law (8)
Denver Business Law (1)
Construction Contracts (5)
Snowboard Gear (1)
Our Courts Colorado (1)
Denver Real Estate (1)
Denver Business Journal (2)
subcontractor negotiations (2)
Certifiably Green Denver (1)
(33)
LLC Law (2)
Non-Solicitiation (1)
Colorado Foundation for Water Education (1)
courts (1)
Non-Compete, Colorado non-compete restrictions, enforcing non-compete, protecting Colorado business (1)
cause for termination (1)
Colorado Enforcement of Non-Compete (2)
Data Breach (2)
Trade Secrets (6)
Non-Compete (2)
Property Surveys (1)
CO Ski and Snowboard Gear Recall (1)
Non-Solicitation (1)
Denver Broncos (1)
Ethics (1)
Co-Ownership Agreement (1)
Denver Colorado Business Attorney (9)
Alternative Dispute Resolution (5)
Litigation (15)
Spanish Speaking Lawyers Committee (1)
Spanish Business Law (9)
Leases (4)
Cherry Creek Chamber of Commerce (1)
Labor (3)
ABA Article (1)
Helmet Recall (1)
Colorado Hispanic Bar Association (1)
Mergers & Acquisitions (5)
ABA (1)
Colorado Employment (20)
CO Attorney Mentoring Program (1)
Colorado business disputes (1)
Real Estate Law Firm (3)
Community (29)
Colorado Judicial Institute (1)
Non-Disclosure (1)
Construction Bond Claims (2)
Colorado attorney mentor (1)
CO Business Non-Solicitation Restrictions (1)
Reed Morris (1)
Employment (3)
indemnifications (2)
Colorado Spanish Legal Services (1)
Commercial Real Estate (2)
Construction (6)
St. Anthony, Minnesota (1)
Colorado Retail Leasing (1)
Data Breach Settlement (1)
Colorado Construction (1)
Denver Sustainable Law Firm (1)
Non-Competition Agreements (12)
Colorado Wrongful Death (1)
Lease Negotiations (1)
Overtime Wages (2)
Enforcing Non-Solicitation Agreement (1)
Real Estate (4)
cyber security (3)
Panelist (1)
Credit Card Data (1)
Research (1)
Colorado at-will employment (1)
Colorado Courts (1)
Master Services Agreement (2)
Colorado Lis Pendens (1)
attorney-client privilege (2)
Denver arbitration (1)
Employment Law (1)
Colorado Business (56)
Wrongful Death Settlement (1)
Colorado Real Estate (11)
Skiing Gear (1)
Colorado LLC (1)
Arbitration (2)
Commercial Property (1)
Mechanic's Liens (1)
Resolving Business Disputes (1)
Spanish Legal Services (7)
Finance Law (2)

Archive