Corporate Liability Protection? Maybe.

Posted on September 17, 2008 by Matt Gardner

Many people understand that a corporation or limited liability company can provide its individual owners with protection from the debts of the company.  For example, if a company is unable to pay its vendors, those vendors are typically unable to go after the owners of the company for those debts.  Or if the company borrows money, the lender can only recover the debt from the company and not the owners/shareholders/members, generally.

However, if the owner of the company has provided a personal guarantee to that vendor or any other entity that has provided money or services to the company, the corporate liability protection is meaningless at that point.  Most guarantees don't require that the creditor look to the company first, but could look first to the individual providing the personal guarantee. 

If at all possible, an owner should avoid giving a personal guarantee when entering into any agreements.   Conversely, as a creditor, whenever dealing with a small business with limited operating history, you should demand a personal guarantee from the owner(s) of the company.

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Think from the End when Starting a New Business

Posted on July 25, 2008 by Kyle Kruidenier

The best time to make decisions regarding how to exit a business venture is at the beginning, especially if the business is to have more than one owner.  Why?  Because, although this my seem a little cynical, it is in all likelihood precisely the time when the soon-to-be business partners will be most closely aligned and focused on a common goal.  It is at this time, when leaving the business is the furthest thing from the partners minds, that objectivity can be achieved and a fair buy-sell agreement can be created that allows a partner out, without placing an undue burden on the remaining partner(s) and business.  At a bare minimum a carefully crafted buy-sell agreement will cover, (1) How the value of an owners interest in a business will be determined; (2) What, if any, internal or external events will trigger a buy-out; and (3) Is the sale of a departing owners interest restricted in anyway.

For information on different types of buy-sell agreements and their tax implications see Structuring Corporate Buy-Sell Agreements by David Joy, Jo Koehn  

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