Personal Guarantees and Business Owner Asset Protection
When you sign a personal guarantee, you agree to pay a company's debt from your own assets if the company cannot. That cancels much of the protection of an LLC or corporation for that debt. Guarantees can be limited, partial or conditional, and the terms are often negotiable. Understand what you are signing, ask for limits where you can, and do not rely on an entity to protect you from a debt you personally guaranteed.
What a guarantee does
A lender or landlord who is unsure about the company's credit will ask the owner to guarantee the obligation. If the company defaults, the creditor can sue you directly and collect from your personal assets, subject to Texas exemptions such as your homestead and retirement accounts. The LLC or corporation does not matter for that debt. Many owners sign guarantees without reading them closely.
Types of guarantees
| Type | What it means |
|---|---|
| Full guarantee of payment | You are liable for the whole debt, and the lender can go after you first |
| Guarantee of collection | The lender must try to collect from the company first |
| Limited or capped guarantee | Your liability stops at a stated dollar amount or percentage |
| Burn-off guarantee | The guarantee ends after the borrower meets certain performance conditions |
| Carve-out or bad-boy guarantee | Liability arises only for specific bad acts, such as fraud or misapplied funds |
What to negotiate
- A cap on the amount, or a limit to a percentage of the loan.
- A burn-off once the business reaches coverage or payment benchmarks.
- A carve-out guarantee in place of a full one, where possible.
- Release if you sell your interest or the lease is assigned.
- Limits on what changes to the loan or lease can extend your liability without consent.
Protecting yourself around a guarantee
- Insure appropriately and keep the company well capitalized.
- Know which of your assets are exempt in Texas. See exempt assets.
- Avoid moving assets after signing, since transfers to avoid a guaranteed debt can be attacked. See fraudulent transfer law.
- Keep a record of the guarantees you have signed, so you know your total exposure.
Spouses and community property
If you are married, a creditor may be able to reach community property that you control, even if only one spouse signs. Some lenders also ask a spouse to sign. Read any request to sign as a guarantor or as a consenting spouse carefully, and ask an attorney before signing it. For real estate loans see holding real estate in an LLC.
Free consultation with a partner attorney. No cost, no obligation.
Book Free ConsultationFrequently asked questions
Can I get out of a personal guarantee?
Only by agreement with the creditor, by paying off the debt or by a release in a refinancing or sale.
Does my LLC protect me if I signed a guarantee?
Not for that debt. The guarantee is your own obligation.
Should my spouse sign too?
Lenders sometimes ask. A spouse's signature can expose their separate property, so get advice first.
Are non-recourse loans guaranteed?
Non-recourse loans often come with carve-out guarantees that become full recourse on specific bad acts.