Food for Thought – The Matter of Personal Liability for Restaurant Debt
September 29, 2008
Restaurants in Massachusetts can be organized to do business in many different corporate forms including Sole Proprietorships, Partnerships, Corporations and Limited Liability Companies. When restaurateurs choose to operate their business using a corporate form such as an LLC, it is often with the belief that, should the business fail to be profitable or close altogether, the owners will not be personally liable for the restaurant’s debts.
Unfortunately, even if the restaurant is operated as a corporate entity, there are instances where the restaurant’s owners may be liable for debts incurred in the operation of their business. One frequently occurring example is when a restaurant’s owner signs a so called “personal guarantee.” Often, the personal guarantee is found on the last page of a form contract, lease or credit application, and it is not completely read or understood by the person signing the guarantee.
In most instances, if the business defaults on its obligations, a personal guarantee contractually obligates its signor to pay from his or her own assets the obligations of the business to the creditor holding the personal guarantee. Frequently, personal guarantees are written so they do not require that the creditor initially look to business assets to satisfy the restaurant’s debt, but instead allow the creditor to immediately pursue the guarantor for payment.
Complications may also arise where there is more than one principal or owner, and therefore more than one guarantor of the restaurant’s debt. Personal guarantees from multiple individuals generally allow a creditor to seek payment for the entire debt from any or all of the principals, and often do not require that the principals pay their proportional “share” of the debt. Rather, the creditor may collect all of the outstanding debt from the guarantor they believe to be most solvent.
Unless the restaurant is well-financed, or the principals have a proven track record of success in the industry, it is likely that lending institutions such as banks and institutional suppliers will seek personal guarantees from the restaurant’s principals. When faced with the possibility of signing a personal guarantee, there are a number of things restaurateurs should consider: …
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by: Mark A. Tanner, Esq.
September 29, 2008