Lesson 56: Leaving is Not Always Easy

From the Business of Business section of How You Can Avoid Legal Land Mines by Joseph S. Lyles (2003).

Fred went into business with a partner to sell mobile homes. To operate, they had to establish accounts with various suppliers. The suppliers wisely required Fred and his partner to sign personal guarantees of the accounts.

When Fred decided to exit the business, he overlooked an important detail – he didn’t cancel the guarantees to the suppliers. Fred’s partner kept the business going for eight more months and ran up substantial charges for supplies on the accounts. When the business failed and the partner vamoosed, the suppliers sued Fred.

If a guarantee has a cancellation clause, it must be followed precisely; however, you may still be responsible for the balance due at the time you cancelled the guarantee. The same rule applies to other authorizations and joint obligations you may have signed. When exiting a business, remember to formally notify all banks, credit card companies and other creditors that you are no longer responsible for the business debts.

The Lesson: Be careful whom you go into business with because leaving them may not be easy. Make sure to cancel any personal guarantees before you exit the business. If you are involved in a very complex business or one involving high potential liability, contact an attorney to obtain guidance on other steps you can take to limit your liability.