Legal Blog

Who Is This LLC And Why Won’t He Pay My Bill? Or, Why You Should Try To Get A Personal Guarantee In Your Contracts.

Any business just starting out is wise to incorporate. There are many different forms of corporations, mostly distinguished by the particular tax advantages each form offers to the incorporators. One of the most common forms of incorporation for small businesses is the LLC or Limited Liability Company.

One advantage that all forms of incorporation share is that they normally shield the individuals who form the corporation from personal liability for the debts of the corporation. In other words, if Billy Joe and Bobbie Sue decide to go into business, they may form a small corporation, known as Take The Money And Run, LLC (hereafter, TTMR, LLC). If you are a vendor who sells goods or services to TTMR, (Let’s say your company’s name is Bobby Mac, Inc.), they will be more than happy to sign your credit application on behalf of the LLC. That way, if they should fail to pay you, your only recourse is against TTMR, LLC which, if Billy Joe and Bobbie Sue are smart, will have no assets. In other words, they (figuratively) run off to Mexico and you are stuck.

Understanding that we who are in business have the main goal of making sales of our services or products, we cannot always be sure that the new customers we are dealing with will be reliable in making payments. It is also impossible to be paid in advance in all circumstances. One way to try to protect yourself as a supplier is to require the owners of the corporation to personally guarantee the payment of the contract.

In our example above, it would be a matter of requiring Billy Joe and Bobbie Sue to personally guarantee (in writing) that you will be paid. That way, even if the LLC has no assets, you can pursue the owners to try to get paid – assuming of course that they have any assets from which you can recover. This is not always practical – no customer wants to sign a personal guarantee, and if you are in a competitive business and are desperate to make sales, you may have to accept some risk by accepting a signature on behalf of the LLC only.

The other key would be to observe your own credit limits – if your contract provides that TTMR has a $2000 credit limit, abide by it. Don’t let them get into you for $4000 or $5000 before you realize you aren’t getting paid.



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