What is a Personal Guaranty Anyway?
Often, even though you have formed a corporation or LLC, the landlord wants you to sign a personal guaranty – a document stating that the company owners will guarantee payment of the rent and performance of all of the tenant’s obligations. This promise of the owners to make good the obligations of the entity is called a personal guaranty.
Personal guarantees are common in real property leases, promissory notes and other large contracts of a business.
What, then, is the point of the entity if you’re going to be personally liable anyway?
The corporation or LLC will still shield you from damage to property or injury to people in your business premises (i.e., slip and fall or product liability). It will ensure that if you breach a contract, the other party is limited to the assets of the business and can’t come after you personally (again, if you are properly formed, properly capitalized and properly run).
A new business is a risky proposition for a commercial landlord. The business has no track record, no credit history, no sales history, no financial history.
And even if it does, suppose there is a change in technologies and your business didn’t make the jump from buggy whips to replacement rubber tires. Business is bankrupt and cannot pay the remainder of the rent or the promissory note or other money owed.
That’s why the landlord wants some security in the form of a personal guaranty of the owners.
It is hard to negotiate for no personal guaranty for a new business, but ask the landlord if they will allow a personal guaranty for only the first term of the lease or for a couple years and it automatically terminates if the rent has always been paid on time.