Food for Thought a Liability
The Matter of Personal Liability for Restaurant Debt
Restaurants in Massachusetts can be organized to do business in many different corporate forms, including sole proprietorships, partnerships, corporations, and limited-liability companies. When restaurateurs choose to operate their business using a corporate form such as an LLC, it is often with the belief that, should the business fail to be profitable or close altogether, the owners will not be personally liable for the restaurants debts.
Unfortunately, even if the restaurant is operated as a corporate entity, there are instances where the restaurants owners may be liable for debts incurred in the operation of their business. One frequently occurring example is when a restaurants owner signs a so-called personal guarantee. Often, the personal guarantee is found on the last page of a form contract, lease, or credit application, and it is not completely read or understood by the person signing the document.
In most instances, if the business defaults on its obligations, a personal guarantee contractually obligates its signor to pay from his or her own assets the obligations of the business to the creditor holding the personal guarantee. Frequently, personal guarantees are written so they do not require that the creditor initially look to business assets to satisfy the restaurants debt, but instead allow the creditor to immediately pursue the guarantor for payment.
Complications may also arise where there is more than one principal or owner, and therefore more than one guarantor of the restaurants debt. Personal guarantees from multiple individuals generally allow a creditor to seek payment for the entire debt from any or all of the principals, and often do not require that the principals pay their proportional share of the debt. Rather, the creditor may collect all of the outstanding debt from the guarantor they believe to be most solvent.
Unless the restaurant is well-financed, or the principals have a proven track record of success in the industry, it is likely that lending institutions such as banks and institutional suppliers will seek personal guarantees from the restaurants principals. When faced with the possibility of signing a personal guarantee, there are a number of things restaurateurs should consider.
Restaurateurs doing business as limited-liability entities, such as corporations or LLCs, should think long and hard before guaranteeing the debt of their business, because doing so effectively strips many of the protections afforded by those entities. Fortunately, if a restaurateur seeks advice from an attorney, accountant, or other professional knowledgeable in this area before signing a personal guarantee or any legal contract, he or she may be able to avoid many of the pitfalls which often accompany such guarantees.
Mark A. Tanner is an attorney in the Northampton office of the law firm of Bacon Wilson, P.C. Prior to practicing law, he graduated from the Hotel, Restaurant and Travel Administration Program at UMass Amherst and the MBA program at the University of Colorado. He managed corporate restaurants for Houlihans and Ruby Tuesday in Massachusetts, New Jersey, and Colorado. Tanner currently advises numerous restaurateurs and other businesses in litigation and business planning matters. This article is provided for informational purposes only, does not constitute legal advice, and should not supplement independent legal advice.