Question: My LLC is borrowing money and the lender wants me to sign a guaranty. Should I sign it?
Answer: It depends on whether you can convince the lender that it should drop the guaranty. A prudent lender will always require that the members of an LLC that is borrowing money personally guaranty the loan. No guaranty – no loan unless the LLC has sufficient assets to assure the lender that the loan will be repaid. Without a guaranty signed by the members, the lender’s only source for repaying the loan is the LLC and its assets. Prudent lenders require the owners of an LLC and a corporation to sign guaranties by which the owners of the LLC promise to pay the loan if the LLC does not do so.
A client sent me a copy of a guaranty that a contractor asked each member of the limited liability company to sign. The client asked:
“If I sign the guaranty, can the contractor come after my personal assets? If so, why doesn’t my LLC protect me from the liability?”
The general rule of Arizona law is that the members (owners) of an Arizona limited liability company are not liable for the debts or obligations of the LLC. There are exceptions to the general rule. The biggest and most common exception arises when a member guarantees the debts or obligations of the LLC.
By guarantying the LLC’s debts or obligations, the member becomes liable under contract law to satisfy the LLC’s debts and obligations that were guaranteed. For example, if the LLC borrows $10,000, the general rule is that the members are not liable for the debt. However, if a member signs a guaranty in favor of the lender that says the member will pay the debt if the LLC defaults, the member is agreeing in the contract (the guaranty) that the lender can sue the member for the amount owed on the loan if the LLC defaults and obtain the member’s personal assets to pay the debt.
LLC members should avoid guarantying debts and obligations of their LLCs unless absolutely necessary.
The concepts described above also apply to shareholders of Arizona corporations and limited partners of Arizona partnership.