Personal Guarantees for Corporate Leases

This means you need to find a location and then sign a lease.

Most businesses fail. Sorry to be blunt, but it is the brutal truth. The magic line in the sand is two years. Between 70 and 80 percent of all businesses fail in the first two years. This is why banks will not touch you during this period. If you can make it past the two year mark, suddenly everyone wants to talk to you, lend you money and so on. This is true even if you are barely getting buy.

Commercial landlords know about the 2 year failure information. In the case of retail landlords for malls and such, they don’t care about the two year rule. They just assume your business will fail. Why should you care what they think? Well, they put a nasty little thing in your lease that can really cause you a lot of problems – a personal guarantee.

A personal guarantee is exactly what it sounds like. You are personally guaranteeing the obligation in the agreement in question. In this case, you are personally guaranteeing that you will pay the monthly rent for the entire term of the lease. If the business fails, you are on the hook.

Ah, but what about your business entity. Doesn’t it protect you from such business evils? No! If you personally guarantee something, you essentially are opening a door in the wall of corporate protection and letting the landlord through. Perhaps a simple example will explain things.

Think about the first time you purchased a car or a home. For many of us, we arranged financial help through the Bank of Mom and Dad. In some cases, they would lose their mind and actually co-sign our loan documents. In doing so, they were personally guaranteeing the repayment of the debt. If we totaled the car or defaulted on the mortgage, they were going to have to pay it.

A corporation provides you with protection from personal liability because of a legal fiction. That fiction says the corporation will be treated as its own “person” under law. When you personally guarantee a corporate debt, you are essentially doing what mom and dad did for you. The only difference is you can’t beat a corporation within an inch of its life if it doesn’t pay the bills!

If your business is functioning as a corporation or limited liability company, never personally guarantee any debt of the business. EVER!

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