Who Is the Guarantor on an LLC?

Why Guaranties Are Required

A personal guaranty is a promise by the principal of a company that he will repay the loan in the event the company fails to do so. Because the financial climate can change at any time, a company that is strong at the present time may be in trouble in the future. The bank requires a personal guaranty as additional assurance that even if the company fails to perform, the individual will back the loan with his own income and continue the contractual repayment.

Who Guaranties the Loan

An LLC is comprised of one or more members. If the borrowing entity is a single-member LLC, that sole member will be the guarantor on the loan. Often, an LLC is composed of multiple members that may designate a manager to sign all documents on the company’s behalf. The fact that the manager handles the LLC’s affair does not preclude the other members from guaranteeing the loan. The bank will still require all members to sign a guaranty unless they hold a relatively small interest in the company, such as less than 10 percent.

Documenting the Guaranty

When an LLC member guarantees a loan, he will sign either an “unconditional” or “limited” guaranty agreement. An unlimited guaranty means the member guarantees all obligations of the company in the full dollar amounts. A limited guaranty means the member only guarantees a percentage of the obligation, typically germane to his interest in the company. For example, if an LLC member with a 20 percent interest in the company provides a limited guaranty of a $500,000 loan, he will only guarantee 20 percent of the loan or up to $100,000. The terms and covenants of the guaranty vary by bank, but often include promises to provide updated financial information, a grant of security interest in the guarantor’s deposits and the terms for release of the guaranty.

Release from the Guaranty

At times, an LLC member may cease his involvement with the company prior to the satisfaction of the loan. If this occurs, he will seek to obtain a release from his guaranty. The guarantor will have to provide 60 days notice to the bank that he will no longer be part of the company. The bank will review the file and return the original guaranty to the borrower, marked as “released.” Whether or not the release of a guarantor affects the company’s loan will depend on the LLC’s performance at the time the guaranty is released.