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Hi, It is not unusual, for a new business, especially a start-up, to be asked for a personal guarantee. That is standard industry practice and has been for decades because the belief is that if the owner(s) of the business are "on the hook" then there is a higher likelihood that the amount is repaid. The economy, of course impacts everything today. However, in the past, and perhaps still today, a company (assuming you mean an LLC or a corporation NOT a partnership or sole proprietorship) may begin developing a credit history/record by making small purchases through store credit from retailers that have house accounts or even through small leases (such as for copiers or computers, for example). The initial amounts that can be charged may be small, but this may help begin the process. The utilities (Internet, phone, cable, electricity, etc.), if they are in the name of the business, can also help in this process. For a business corp. or LLC to obtain a credit record accoutns must be established in the name of the business.
Thanks for the info. Also, I don't know if you know this or not but when it comes to obtaining credit for your business. My question is, if you have already opened up past credit accounts with a personal guarantee in your company and later opened up newer credit accounts without a personal guarantee, would the newer credit accounts be able to hold the owner liable if something was to happen simply because corporate record may show that the owner had made personal guarantees in the past?
Hi, a personal guarantee is a contract and it normally only applies in cases where the parties agree to its existence. Thjerefore, personal guarantees are between specific parties and different parties that later provide credit but have no relationship with the first entity that obtianed the personal guarantee would be unlikely to collect on a previous guarantee. Be aware, however, that corporate or LLC credit obtained in the name of the company need to be signed for properly, for example, if the owners of an LLC or corporation signs not as a corporate or LLC officer or member, but as an individual, then the creditor may still be able to make an argument that the credit was personal. Also, if the credit is used for personal purposes that also may allow a creditor to claim personal payment. So there is more to it than just getting the credit in the name of a business to avoid personal liability. In short, like many legal issues, there is the rule and then there are exceptions to the rule.
Excellent response :) - Can you recommend a book on this topic. Maybe a guide of some sort that would give a person a very clear and very detailed explanation on how to do things properly for a corporation to avoid any problems when it comes to personal liability?
I foresee a nice bonus coming your way!
Hi, I have not been to libraries for a while, but the issue of personal liability for corporate/LLC debts involves a concept referred to as "piercing the corporate veil" which is what happens when one uses business assets/credits for personal reasons and the signature issue, ensuring one signs as a "corporate" or LLC/business agent is often discussed in agency law principles or in terms of "capacity" and signature. These issues are discussed here and here, but the words to look for a "personal liability," business, and contract, as well as capacity and agent. Note, of course, that every state's courts can interpret what is a proper signature and what is or is not "piercing the corporate veil" or not based on their own criteria, so state legal definitions and interpretations will make this different in almost every state.
You can find articles and books on the subjects indicated above, as well as on "corporate formalities" (what you need to do to have a corporation and meet formaly filing and other state law requirements of business owners (like having annual shareholder meetings, keeping track of shareholders, of similarly for LLC members, etc.).
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