Let’s assume that you are the owner of a small business (a corporation or limited liability company) working to obtain a contract for services for the business. You’ve done your research, found a solid services company to work with, negotiated the services and payment details, and are at the conference room table about to sign the contract.
Two things could happen here – (1) concerned about the success rate of small businesses, the services company requires that you, as owner of the business, sign a personal guaranty; or (2) the services company does not require any cosigner, guarantor, or personal guarantee.
The services company requires that you, as owner of the business, sign a personal guaranty.
As confident as you may feel about the success of your small business, it is actually common for owners of small corporations and/or LLCs to be required to sign personal guarantees when entering a contract for their business. In this scenario, similar to the one above where the good friend cosigned a lending agreement, you must understand that by guaranteeing or personally cosigning your business’ contract, you are signing away the limited liability rights and status that you may otherwise have had. And, in the worst case scenario where your small business defaults on the contract payment terms, the services company will be able to, within the terms of the guarantee, seek payment directly from you personally!
The services company does not require any cosigner, guarantor, or personal guarantee.
In the second scenario, where the services company does not require that anyone cosign or personally guaranty the services contract, it is imperative that you, the small business owner, take care in signing the document. While it may be second nature to just quickly and casually scribble your name on the signature line, failing to include your title and position in the business or, even better, words similar to “president, signing on behalf of small business” may be a fool’s move!
Without ensuring that it is perfectly clear that you have signed solely on behalf of the business, you open yourself up to possibly being held personally liable for the contract terms and obligations! Even if you do sign the document as described above, you should also be sure that your signature isn’t doing “double duty.” Specifically, fine print, buried deep in the contract may state that the business signer is also personally liable, even if there is only one signature block! This is a very dubious, but increasingly common, provision; why take the tisk? As such, reviewing not only all of the terms and provisions, but also the signature block, of your small business contract, and then taking care in how you sign such contract, is crucial!
Now, what happens if you do not own the business, but rather are an employee who was tasked with obtaining a contract for the business as part of your job?
In this scenario, it is unlikely that you would have signatory power for the company. In other words, you are not able to sign a contract with any meaningful business title using the words suggested in the above paragraph. As a result, you might be signing the contract personally, which, as above, opens you up to potential personal liability for all of the terms and conditions of the contract.
So, if you are this small business employee tasked with obtaining some sort of goods or services contract for your company, while you should feel comfortable researching providers of said goods and services, when it comes time to sign a contract, it is absolutely in your best interest to hand it over to the boss.
By: Attorney Jonathan Gelber