Among the issues that guarantors of family entrepreneurs should take into consideration when deciding whether to structure a contribution contract are: consider the simple example of three members of a family business created as a limited liability company and lending three million dollars to a bank to finance the purchase of commercial property. The loan is secured by a mortgage on the property and the three members of LLC are jointly and several guarantors of the entire loan. One LLC member guarantor holds a 60% interest in LLC, another owns 30%, and the third LLC member owns 10%. The loan is overdue and the lender requests payment from LLC`s member guarantors. The LLC guarantee, which holds an interest rate of 10%, pays the full balance of the credit and then invites the other guarantors to pay their fair shares in the stranded loan. How much does each remaining LLC guarantor have to pay? All applicable issues should be the subject of a well-developed contribution agreement. In the absence of such an agreement, the answers may be unclear and vary from state to state. Guarantors of entrepreneurs should also consider the impact of their assessment obligations on federal income tax, including the possibility of attributing losses to a credit transaction that is a partnership or limited liability company taxed as a partnership. In the absence of a contribution agreement, the paying guarantor of LLC is entitled to a refund of a portion of the amount paid to the lender, in accordance with common law assessment principles. Many are surprised that in the absence of an agreement to the contrary, the general rule (subject to many exceptions and qualifications) is that guarantors are required to agree, so that each pays an equal percentage of the total amount paid by the guarantors, while they may have very different ownership shares in the borrower. In the example above, in the absence of a contribution agreement setting out the guarantor`s payment obligations in accordance with the ownership of LLC members, any unpaid LLC member guarantor would be required to pay the LLC paying guarantor one-third of the amount it paid to the bank, so that each of LLC`s three member guarantors would ultimately bear one-third of the loss.
All of LLC`s collateral would be entitled to full repayment by LLC, but with the loan delayed, LLC will likely not be able to pay what it owes. When a family business lends money, the lender often requires some or all of the owners to guarantee the loan. If one of the guarantors of the holder of the company pays the guarantee, this guarantor is entitled to the contributions paid by the other guarantors. However, the standard state law on the share of the loan that any business owner is required to pay often differs from what the business owner`s guarantors would have agreed if they had knowingly considered the problem at the time of the guarantees. In order to avoid uncertainties and disputes, guarantors of family entrepreneurs should always conclude a contribution contract setting out their respective contribution obligations in the event of a call for guarantees. Here is a link to an article that examines the problems in much more detail: After the guarantor pays. These problems can arise in many contexts that go beyond safeguards. They arise in any situation where several parties are responsible for the same guilt or guarantee….