"Limited liability" and Personal Guarantees?

If your business is a corporation, LLP (limited liability partnership) or LLC (limited liability company), it has limited liability. That means that the owner is not personally responsible for the debts of the business. If the business goes bankrupt, the owner should be able to escape personal liability for the debts of the business.

If your business is a sole proprietorship or a partnership, you don't have the protection of limited liability. The owner can be pursued personally for business debts.

So what happens to your limited liability when you sign a personal guarantee? If you are transacting a loan with a bank or a commercial lease with a landlord, you will get a demand for a personal guarantee of the obligation. In that case, the personal guarantee trumps the limited liability, and you could be held personally responsible for the obligation if your business doesn't pay.

Most lenders making loans to family-owned companies, LLPs or LLCs will insist on a personal guarantee.

But if you waived your limited liability by giving a personal guarantee to a lender or a landlord, that doesn't mean that you've waived your protection for other liabilities. For instance, you'd still have limited liability protection against product liability claims or tort claims arising from negligent acts by an employee.

Will the owner's personal assets always be protected by the limited liability of the corporation or LLC? The protection is good, but not absolute. If a corporation doesn't pay its employees, the shareholders can be held liable for up to six months' wages. (This rule doesn't apply to LLC or LLP owners.) If a business has unpaid federal taxes, a claim of limited liability will certainly fail for owners of corporations, LLCs and LLPs, or if a business owner causes a problem due to his gross negligence.