Small Business Owners and Guaranties

Typically, small business owners generally wind up being liable for most (if not all) of the business’ debt.  The biggest reason for this is that it is rare for anyone to lend money to a truly small business without requiring that some individual be on the hook for repayment.  Now, I realize that small business can have a broad meaning — according to recent SBA loan programs, the LA Lakers qualify; but when talking about really small businesses with limited assets, limited funding and a one or two tier management structure; most lenders want to know that some body is liable for the debt.  The most common way of making that happen is requiring that the owner sign a personal guaranty for the debt.  This means exactly what it sounds like, the business owner is guarantying that the debt will be paid by the owner if the business fails to pay it.

The second most common way that business owners wind up being liable for debt is carelessness.  All too often when an account is opened with a vendor or something is signed for, the business owner simply scrawls his (or her) name on the signature line.  Well, when you sign your name, you are generally committing yourself personally to the repayment of whatever you just signed for.  The way around this is to always sign for things using your business capacity — Jane Doe, as President of Jane’s Business, Inc. or as Manager of Jane’s Business, LLC. or in some other way indicating that the signature is solely on behalf of the business entity and not the individual.

The exception to this is that if the business is not an entity registered with the State (like a corporation, LLC or partnership), there is no one who can be liable for the debt other than the business owner.  In that case the business owner IS the business.  This is called a sole proprietorship or a d/b/a (doing business as).

The third way that owners become liable for business debt is because they fail to maintain the business in good standing with their State.  In Oklahoma the Secretary of State requires that corporations and LLC’s file annual paperwork with the State and pay a small fee in order to remain in good standing.  If a business owner allows the corporation or LLC to fall out of good standing, then personal liability may attach for debts incurred in the meantime.  The ability to remove that personal liability by reinstating the corporation or LLC depends on a number of factors.

If you own a small business, and it has incurred more debt than it can easily keep up with, you need to know what your liability is for that debt.  If you don’t know, consult a legal advisor.  You will also want to make sure that your corporation or LLC is in good standing with the State.  Don’t just assume that your Accountant has taken care of that when preparing your taxes each year.  It is easy to go to the Secretary of State’s website, search for your name and verify your status.



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