Personal Guarantees in Contracts: 101
At Wakefield Law, we have many clients who run businesses. Those businesses often sell their goods or services to other businesses. We also have clients who own commercial properties and rent those properties to businesses. When a business contracts with another business for goods, services, or leases commercial space to another company, a well-drafted contract is your first line of defense in the event that a dispute arises. But what happens when the business itself can't—or won’t—pay? That’s where a personal guarantee shows its value.
What Is a Personal Guarantee?
A personal guarantee is a legally binding promise by an individual—usually the business owner or an officer of the business—to repay a debt or fulfill a contract if the business fails to do so. It turns “limited liability” into “personal responsibility.” Many business owners try to avoid personal guarantees because one of the reasons a business exists as a corporation or LLC is to separate that business’ success or failure from one’s personal assets. However, if the business owner is trying to get a commercial space or buy goods or services on credit, the selling company will often require (or at least should require) a personal guarantee make it more likely that the bill will be paid.
Why Contracts Aren’t Enough on Their Own
Contracts set the rules. They define payment terms, delivery timelines, responsibilities, and remedies. But when a business entity is the only party liable, your recourse may be limited to chasing assets that no longer exist, or never existed. Many small businesses are LLCs or corporations with no meaningful assets beyond a bank account—which may be empty by the time legal action is taken.
Why a Personal Guarantee Strengthens Your Position
Requiring the owner or principal to personally guarantee payment ensures:
Expanded recovery options if the business defaults
Incentive for compliance, as the guarantor risks their personal assets
Avoidance of “judgment-proof” scenarios where the business folds, leaving creditors empty-handed
Leases & Commercial Rent
For landlords, requiring a personal guarantee on a commercial lease is non-negotiable. Businesses may fail, pivot, or disappear, but the individual who signed the guarantee is also accountable. Without one, you risk unpaid rent, legal fees, and a vacant space—while the LLC walks away unscathed.
Selling Goods or Services
Whether you're a vendor supplying construction materials or a professional firm offering services, securing payment is critical. A personal guarantee aligns the business owner’s interests with yours. It shows commitment—and provides a path to recovery if things go sideways.
Bottom line: A contract protects your business. A personal guarantee ensures an individual is also liable. If your company is extending credit, delivering goods, offering services, or leasing property, don’t just settle for the company’s promise—get the owner’s guarantee, too. Give us a call at Wakefield Law if you need your lease or contract reviewed – 703.771.9740