One thing that business owners never put much stock in, is knowing exactly where they are personally liable. Many business owners think that the corporation protects them from everything. This could not be further from the truth. The corporation protects you from most things, but not all things.
In my view identifying, assessing and mitigating risk is the most important functions in my role as Part Time CFO.
One of the first risks I am going to identify for the new business owner is Personal Liability Exposure. The first things I investigate are bank loans, equipment leases and property leases. If these exist there is a strong likelihood of personal guarantees. Although the corporation is the primary guarantor of the loans or leases it is inevitably backed by the business owner's personal guarantee. The next thing I look at is if there are any personal guarantees with inventory suppliers. This is one the hidden sneak up on you type of risks. When one fills out the credit application to do business with an inventory supplier, more times than not there is personal guarantee language in a separate section of the application. One way to flag this is if you have to sign twice on a credit application, one of those signatures is probably a personal guarantee. Anytime I am filling out a credit application for a client I always cross out the personal guarantee language section and do not have the client sign that section. However, most business owners feel it is part of the application and fill it out and when they do, they become personally liable and exposed on their inventory purchases. This is a major risk. If you cross it out and the supplier calls you back and requires it, you can assess at that point how important the supplier is and whether or not you want to take that risk. In most cases suppliers look at the business owner signing the personal guarantee as bonus security and they do not care if the the customer crosses it out.
Here is another area of personal guarantee that goes unnoticed.
All fiduciary taxes such as payroll taxes, payroll withholding, withholding's of medical insurance premiums and sales taxes must be paid. If left unpaid, this will create more personal liability especially for whoever is the treasurer of the corporation. Unpaid corporate income taxes may also create personal liability.
Company credit cards outstanding represent more personal liability risk for the business owner. The business owner or CFO should at least look at the possibility of one of the versions of the Corporate American Express Card that have no personal liability to the business owner. I recently got one for a client. They are not easy to get, but it is well worth looking into to see if you qualify.
Generally speaking the business owner usually thinks nothing of the personal liability exposure in the areas I just mentioned until the business is in trouble and someone alerts them to the exposure. Whatever services the business owner needed whether it is a bank loan, inventory, a credit card etc..., they needed it and that is fine, but what I am saying is at least know your exposure. In other words I understand why you signed the personal guarantee, but it is critical that you are aware you signed it and that you know where you have personal guarantees. For example, if you know you have a personal guarantee with an equipment lease and your cash flow dictates that you can pay either a telephone bill or the equipment lease payment but not both, by knowing you have a personal guarantee with the equipment lease, in my view it is wise to pay the equipment lease first. It just makes sense for your own protection.
The overall risk that must be assessed regarding personal liability is what is the likelihood that the company will not make its loan payments, its lease payments, its credit card payments or its inventory payments or whatever payments there is personal liability exposure? Are these payments current now? Is the current and projected cash flow strong enough to at least make these payments? If not, has the owner begun to research and utilize asset protection strategies to protect their personal assets should they come under attack? These are the questions you need to ask yourself. So the suggestion is, if you currently own a business or if you are starting a business, identify assess and mitigate your personal liability exposure. If you are not in business as of yet understand that the corporation is not going to fully shield you from personal liability and understand the areas where you will be personally liable. If you have a business partner make sure they understand what the personal liability exposure is and how you are going to share that risk.
