Should You Have a Personal Guarantee in Your Contracts?

In the course of your business dealings, you may have legitimate concern over what happens if you don’t get paid for a service you render, or a product that you provide. In many cases, it may seem as simple as filing a lawsuit to collect your money. But as many who have done it before can tell you, suing and collecting are two very different things.

That’s why many businesses turn to personal guaranties as extra insurance to make sure that they are paid in the event of contractual default. Personal guaranties can have pros and cons, and of course, whatever is a pro to you as someone who is owed something can be a con if you’re on the other side of the agreement, unable to pay or fulfill an obligation under a contract.

The Problem With Corporations and Other Business Entities

Normally, we can only enforce contracts against those who sign them. That sounds obvious. But corporations, limited liability companies, and other business entities are separate legal entities, able to sign and agree to things independent of the individuals who actually sign an agreement. That means that if a company signs your agreement, you can only sue the company in the event of default.

In other words, someone who signs as “Jane Smith as VP of Cool Goods Ltd,” is only signing as an agent of the company, and is only binding the company to the agreement. If the CEO personally has $10 million in assets but they are hers personally, you may not be able to touch them to collect on the judgment you obtained only against the company.

Companies go bankrupt often, and people can often transfer assets in and out of companies. So if you can only sue a company because only a company representative signed your agreement, what guarantee do you have that the company will have sufficient assets to pay any judgment you obtain against it?

Using Personal Guaranties

The answer is often in a personal guarantee. This is a guarantee by an individual (usually a higher ranking officer or owner of the company) that the individual will pay for any judgment entered against the company, and that if you need to collect on a judgment against the company, you can collect against that person’s individual assets.

A personal guarantee often has a number of benefits; for example, (1) it tends to encourage companies to abide by debts, because the owners or officers could lose personal assets if there’s a default; (2) it gives you an extra pocket to collect from in the event of default; and (3) it prevents owners from siphoning assets out of the company name into their own names to avoid paying judgments.

Of course, nothing is an absolute guarantee—a person may have insufficient assets to pay a judgment the same way a company does. Anytime you enter into a significantly valuable agreement, you should always make sure before entering into the agreement that you have enough security to get paid and collect on a judgment if needed.

Protect yourself and your businesses by making sure your contracts are enforceable and collectable. Contact Tampa business attorney David Toback to discuss your needs and review documents to make sure your business transactions go as planned, without problems.