Business credit card + personal guarantees

[xiphosm3]

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?

 

[dee_dub]

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?

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?

 

[adjusterjack]

Can he legally transfer his personal guarantee to me?

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.

 

[xiphosm3]

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?

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.

 

[xiphosm3]

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.

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.

 

[army judge]

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.

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.

 

[xiphosm3]

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.

Care to elaborate on my misunderstanding? A link to several articles explaining the difference between a S and C corp isn't necessarily beneficial.

 

[army judge]

Care to elaborate on my misunderstanding? A link to several articles explaining the difference between a S and C corp isn't necessarily beneficial.

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.

 

[xiphosm3]

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.

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.

 

[army judge]

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.

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

 

[adjusterjack]

I dont have any desire to accept this personal guarantee,

Then don't.

Nobody can force you to sign your name to something and the bank isn't going to let the CEO off the hook.

No reason for you to stick your foot in the bear trap.