Most commercial landlords and lenders require personal guarantees from their tenants and borrowers. Small business owners often believe they have no other option than to agree to the terms of the personal guaranty agreement provided to them by the landlord or lender. However, in these troubled economic times, landlords and lenders have fewer attractive prospective tenants and borrowers, giving tenants and borrowers more leverage to negotiate favorable terms.
It is important to understand that even if a lease or loan is made in the name of the corporate entity, the limited liability protection afforded by these entities is eliminated once a personal guaranty is signed. In other words, even if an entity goes bankrupt, landlords and lenders can pursue the owner’s personal assets if she signed a personal guaranty. Most standard landlord-friendly personal guarantees have provisions that protect the landlord even if the tenant files for Chapter 7 (personal) bankruptcy. Therefore, a small business owner tenant can be stuck paying a high price tag for a bad business venture for years to come.
So how can a business owner manage the risk or minimize potential personal liability?