Personally Guaranteeing Company Debt

One of the benefits of forming a company instead of operating as a sole proprietorship, is to try and limit personal liability for company debts. Generally, an owner of a company is not liable for the company's obligations so long as the company and its owner act as distinct and separate entities. However, in practice, personal liability cannot always be guarded against, especially when the company's owner signs a personal guaranty.
In the recent case of Cardinal Health 108, Inc., et al. v. East Tenn. Hematology-Oncology Associates, P.C., et al., a physician medical practice entered into a credit application with a specialty pharmaceutical supplier for various medications. As part of the application, the three physician-owners of the medical practice company each signed a personal guaranty for all supplies purchased. The medical practice racked up over $1.2 Million in unpaid orders and the supplier demanded payment. Ultimately, the supplier filed a lawsuit and obtained a judgment against the practice as well as the individual practice owner physicians. The Court of Appeals affirmed the judgment.
Personal guarantees may appear inescapable as many business owners find that suppliers or lenders require such documents. However, in negotiating for any business transaction which seemingly requires such a guaranty, it never hurts to try to negotiate the guaranty out of the transaction, a limitation on the amount guaranteed, or simply negotiate with other suppliers who may not require such agreements. If a guaranty is in place, however, and a dispute arises between the company and the supplier, care must be taken in the approach to resolving that dispute, or more than just the company's assets will be at stake. Legal counsel can be helpful with both the negotiations as well as if a dispute arises.