Business credit card + personal guarantees

X

xiphosm3

Guest
Jurisdiction
Washington
I co-own a WA S-corp. Shortly after the company was founded, we applied for a company credit card. My business partner personally guaranteed the debt as he was the majority shareholder in the company. He has since resigned and is now asking me to accept personal responsibility for the credit card debt even though he is still majority owner. Can he legally transfer his personal guarantee to me?
 
xiphosm3 said:
He has since resigned and is now asking me to accept personal responsibility for the credit card debt even though he is still majority owner. Can he legally transfer his personal guarantee to me?
Click to expand...
Yes, but only if both you and the bank agree to it. The bank needs to be satisfied that you are good security for the debt, and you need to have a good reason to assume it. (Like, f'rinstance, you're buying him out of the company, and taking on the debt as part of the purchase price.) Why does he think you should be personally liable, not him?
 
xiphosm3 said:
Can he legally transfer his personal guarantee to me?
Click to expand...

Sure.

All he needs is your approval and, more importantly, the bank's approval (in writing) to release him of his obligation.

Without the bank's approval, you and he can certainly agree that you take over the guarantee but the bank will still be able to go after him for the debt if you don't pay.

You say he resigned but is still an owner. Resigned from what? Is he going to keep collecting money from the business with you doing all the work? Maybe that's something you need to think through before you accept liability for debt that he might have incurred.
 
dee_dub said:
Yes, but only if both you and the bank agree to it. The bank needs to be satisfied that you are good security for the debt, and you need to have a good reason to assume it. (Like, f'rinstance, you're buying him out of the company, and taking on the debt as part of the purchase price.) Why does he think you should be personally liable, not him?
Click to expand...

He is emotionally done, didn't like some decisions that were made by the board and now he wants out. He is still keeping his shares so there is no buyout, nor would I purchase his shares.
 
adjusterjack said:
Sure.

All he needs is your approval and, more importantly, the bank's approval (in writing) to release him of his obligation.

Without the bank's approval, you and he can certainly agree that you take over the guarantee but the bank will still be able to go after him for the debt if you don't pay.

You say he resigned but is still an owner. Resigned from what? Is he going to keep collecting money from the business with you doing all the work? Maybe that's something you need to think through before you accept liability for debt that he might have incurred.
Click to expand...

He was the CEO. Yes, since he is a shareholder of an S-Corp, he will make money from the business. I dont have any desire to accept this personal guarantee, thats the whole point of a corporation.
 
xiphosm3 said:
He was the CEO. Yes, since he is a shareholder of an S-Corp, he will make money from the business. I dont have any desire to accept this personal guarantee, thats the whole point of a corporation.
Click to expand...

I think you misunderstand the IRS definition of a corporation, versus the legal definition of a corporation, (a "C" corp).

My friends at legalzoom offer an excellent contrast of the two:

S Corporation or C Corporation

The SBA offers more distinctions between the two:

S Corporation | The U.S. Small Business Administration | SBA.gov


Last, but not least, the MOST important distinctions between the two:

S Corporation Advantages & Disadvantages | Forming an S Corp

Before you drift too far to starboard, I suggest you speak with your corporate counsel. If, at this late date you haven't retained one, you must do so ASAP.
 
Last edited:
army judge said:
I think you misunderstand the IRS definition of a corporation, versus the legal definition of a corporation, (a "C" corp).

My friends at legalzoom offer an excellent contrast of the two:

S Corporation or C Corporation

The SBA offers more distinctions between the two:

S Corporation | The U.S. Small Business Administration | SBA.gov


Last, but not least, the MOST important distinctions between the two:

S Corporation Advantages & Disadvantages | Forming an S Corp

Before you drift too far to starboard, I suggest you speak with your corporate counsel. If, at this late date you haven't retained one, you must do so ASAP.
Click to expand...
Care to elaborate on my misunderstanding? A link to several articles explaining the difference between a S and C corp isn't necessarily beneficial.
 
xiphosm3 said:
Care to elaborate on my misunderstanding? A link to several articles explaining the difference between a S and C corp isn't necessarily beneficial.
Click to expand...

I suggest you discuss the subtleties and distinctions with your "corporation's" attorney.

If the only issue is the debt owed on the corporate credit card, the easiest solution to that impasse is for the corporation to pay off the corporate debt, while the major shareholder simply closes the account.

Is the company solvent enough to pay off the debt in full?

Now, if the corporation survives not on income but by borrowing from Peter to pay Paul, that's a bigger issue.
 
army judge said:
I suggest you discuss the subtleties and distinctions with your "corporation's" attorney.

If the only issue is the debt owed on the corporate credit card, the easiest solution to that impasse is for the corporation to pay off the corporate debt, while the major shareholder simply closes the account.

Is the company solvent enough to pay off the debt in full?

Now, if the corporation survives not on income but by borrowing from Peter to pay Paul, that's a bigger issue.
Click to expand...

Company is not solvent enough to pay the balance, only the minimum payment right now, and there is a small chance of bankruptcy within a year.
 
xiphosm3 said:
Company is not solvent enough to pay the balance, only the minimum payment right now, and there is a small chance of bankruptcy within a year.
Click to expand...

Well, the answer is moot, mate.
Your primary stockholder sees the handwriting on the wall.
He's no longer willing to sink more money into something without seeing a return.
The outlook for our overall economy is bleak.
Our GDP continues its downward spiral.
Illegal immigration continues to siphon off money the federal governmemt doesn't have.
Almost 100,000,000 workers have decided to no longer seek employment.
Poorly negotiated trade deals have caused our jobs to be exported to other countries where fair wages are non-existent.
Meanwhile new job growth has disappeared.

If keeping the lights on has become a problem, it's time to consider bankruptcy.
This is where understanding the pitfalls of a chapter s versus a chapter c corporation comes in handy.

As an owner of a chapter s corp, all of you are on the hook to eat the debt.
That means your ALL of each owner's personal assets are at risk.
The personal guarantee by your former CEO means something to the bank.
As far as corporate debt, share and share alike, mate
You all stand to lose something if this thing becomes insolvent.
You should immediately endeavor to determine what (as in how much each of you could lose) is at risk for each shareholder.

The solution, could be bankruptcy, rather than simply closing your business.





S-Corporation Bankruptcy and Personal Liability - Avvo.com




S Corporation Stock and Debt Basis




http://www.bernsteinshur.com/wp-content/uploads/2013/07/The-Shareholders-Loan-to-the-S-Corp.pdf




Bankruptcy and S Corporation Pass-Through




Bankruptcy Rules for S Corporations
 

Share this page

Get a free case review from a lawyer
Back
Top