"Limited liability" and Personal Guarantees?

If your business is a corporation, LLP (limited liability partnership) or LLC (limited liability company), it has limited liability. That means that the owner is not personally responsible for the debts of the business. If the business goes bankrupt, the owner should be able to escape personal liability for the debts of the business.

If your business is a sole proprietorship or a partnership, you don't have the protection of limited liability. The owner can be pursued personally for business debts.

So what happens to your limited liability when you sign a personal guarantee? If you are transacting a loan with a bank or a commercial lease with a landlord, you will get a demand for a personal guarantee of the obligation. In that case, the personal guarantee trumps the limited liability, and you could be held personally responsible for the obligation if your business doesn't pay.

Most lenders making loans to family-owned companies, LLPs or LLCs will insist on a personal guarantee.

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