The Benefits of a Personal Guarantee
As you probably know, when someone signs a contract in his or her official capacity for and on behalf of a company, only the company, not the person signing can ever be held liable for damages in the event of a breach of that contract, absent certain specified exceptions in the law.
This is called the corporate veil, and it can either be a great help, or a hindrance, depending on who you are.
The Pros and Cons
On the one hand, this corporate protection is a great shield, ensuring that your personal property is never at risk in the course of commercial and business relations. You can commence business knowing that your personal items and assets are safe.
But this protection can also have some drawbacks: if you are the party seeking to enforce a contract, you can be left without a lot of assets to collect upon in the event that you do get a judgment. Many companies operate with a financial loss, or with assets that have no equity or value.
And, knowing that only corporate, and not personal assets are at risk, parties to a contract may be more willing to breach that contract.
That isn’t helpful if you’re the one who has to enforce the agreement against the breaching party.
The Personal Guarantee
But one thing can override the corporate veil, and make sure that it isn’t a problem: getting a personal guarantee.
A personal guarantee is where the person signing agrees that his or her assets personally can be reached, in the event that the company breaches the contract. If you’re the one who breaches, this is a very bad thing. But if you’re the party enforcing the contract against the breaching party, it can be very helpful to you.
Personal guarantees work one of two ways, depending on the wording. In some, you can immediately go after the person signing, if the company breaches. In the other kind, you need to get a judgment against the company first, before you can sue or go after the assets of the individual.
Either way, a personal guarantee can be a powerful incentive to people to comply with the terms of an agreement, and can give you a pot of money or assets to help you ensure that you can collect on any judgment that you might get in court.
There are bankruptcy benefits as well. If the company files for bankruptcy, the personal guarantee is still valid and enforceable. And conversely, if the person files for bankruptcy, the company is still liable for damages under the contract.
None of this is foolproof. A person may be just as unlikely to have assets to satisfy a debt as a business. Still, a personal guarantee may give you some degree of security, when entering into important contracts.
Should you sign that personal guarantee? Call our West Palm Beach business litigation attorneys at Pike & Lustig today for help and advice.