Personal Guaranty – Taking Scissors to the Corporate Veil

A few weeks ago I wrote about the concept of piercing the corporate veil.  I received an e-mail asking what happens when someone breaches a contract he signed that included a personal guaranty.  Short answer – get a lawyer.  Here’s the long answer…

A personal guaranty is sometimes required for a contract.  Commercial landlords often require one before leasing space, as do banks when issuing lines of credit.  The terms of the guaranty are usually set forth in a separate section of the contract, or sometimes in an entirely separate contract.  Personal guaranties are signed by someone not in his capacity as a business owner, but in his capacity as an individual.  This is a significant difference and you should be aware of the implications when you’re asked to sign a personal guaranty.  While we’re on the topic, be sure of what you’re signing.  Personal guaranties are often at the end of whatever contract they’re attached to and apparently they can be easy to miss.  I’ve spoken with too many people who, after breaching a contract, are surprised to see that they signed a personal guaranty and are now losing sleep worrying about their personal assets.

When you sign a personal guaranty, you are in essence handing the other party a pair of scissors they can use to shred your corporate veil.  Before you sign a personal guaranty, be sure you can utter the following statement with a straight face: I [insert name here] am personally on the hook for all the promises I made in this contract.  If I don’t live up to these promises in this contract, you can have my life savings and my house.