Offices in Ottawa and Perth
(613) 722-1500

CONTACT US (613) 722-1500

Personal Guarantees in a Corporation

Personal Guarantees in a Corporation

By:

Posted March 22, 2019

When speaking to a client about starting their business, I often discuss the different structures available (e.g. sole-proprietorship, partnership, corporation, etc…), as well as the various benefits and drawbacks for each one. One of the main advantages of incorporating, beyond certain tax benefits, is limiting the liability of the corporation’s shareholders. Unfortunately, there are some situations where the individuals involved in the corporation could still be exposed personally. One of the most common is a personal guarantee.

A personal guarantee is a promise from an individual to be responsible for the debt and/or obligations of a corporation in the event the corporation is unable to repay its loan or fulfill its commitments. This is usually required in a variety of situations, but most commonly when lenders wish to loan money or when a landlord wishes to lease a commercial property. The reason for requesting this is similar to what many of us experienced when we first started out on our own, whether it be going to university or renting an apartment for the first time. At that time, most of us did not have much of a credit history, so our parents likely had to co-sign on a loan for tuition or on a lease for a tiny apartment. That way, if we did not pay, the lender or landlord would have someone else to pursue with the means to pay whatever was owed. The same logic applies for a personal guarantee in support of a corporation. Since the lender or landlord may have concerns about the corporation’s ability to fulfill its obligations, they often need extra protection in the form of a personal guarantee (as well as other types of security, such as a mortgage or general security agreement).

Unfortunately, personal guarantees are a common requirement and difficult to avoid when operating a corporation. However, depending on the circumstances, there may be some ways to limit your personal liability. One is to try to limit your guarantee to a certain amount of money. Most entities will require you to provide an unlimited guarantee (meaning you are personally responsible for all amounts owing) but you may be able to negotiate to reduce this to a specific dollar amount (so that any amount above that would not be your responsibility). Also, you may be able to limit the amount of time your personal guarantee is in effect. Most personal guarantees are in place until all obligations have been satisfied (such as payment in full) but it may be possible to set an end date (e.g. the personal guarantee expires after three years).

In closing, personal guarantees play an important role in most businesses and it is important to understand the ramifications associated with them before agreeing to provide one.

This blog post was written by Jason Peyman, a member of the Real Estate and Business Law teams.  He can be reached at 613-369-0376  or at jason.peyman@mannlawyers.com.

More Resources

Blog |
Real Estate

By: 

Posted March 15, 2023

Clients often have a lot of questions about the purchase process, such as ‘when do I get my keys’ and ‘will we meet in person[...]
Blog |
Family Law

By: 

Posted March 13, 2023

Registering the birth of a new baby can be done online through the Service Ontario website. With the province’s ‘5-in-1 Newborn Bundle,’ you can register[...]
Blog |
Estate Litigation

By: 

Posted March 7, 2023

As is now clear, the traditional approach in estate litigation that “the costs of all parties are ordered payable out of the estate has been[...]
Blog |
Employment, Labour, and Human Rights

By: 

Posted February 21, 2023

The recent Ontario decision, Steele v. The Corporation of the City of Barrie, 2022 ONSC 7245 (“Steele”), has expanded on the case law centering on[...]
Blog |
Family Law

By: 

Posted February 14, 2023

The short answer is yes. The long answer is, it’s complicated. Children have a legal right to be heard and listened to according to the[...]
Blog |
Real Estate

By: 

What is it? As of January 1st 2023, The City of Ottawa requires all eligible property owners to declare the vacancy status of their homes.[...]

Subscribe to Our Newsletter

"*" indicates required fields

Name*
Consent*
This field is for validation purposes and should be left unchanged.