All applicable issues should be addressed in a well-developed contribution agreement. In the absence of such an agreement, the answers may be ambiguous and vary from state to state. Business owners should also consider the impact of their contribution obligations on federal income tax, particularly the possibility of affecting losses from a credit transaction that is a limited liability corporation or corporation. When a family business lends money, the lender often requires a few or all contractors to secure the credit. If one of the holders pays guarantees on the guarantee, that surety is entitled to a contribution from the other guarantors. However, the State Act in breach of the share of the loan to which each business guarantor is required is often different from what the guarantors would have agreed if they had examined the matter in an informed manner at the time of the guarantee. In order to avoid uncertainty and litigation, owners of family businesses should always take out a contribution contract setting out their relative contribution obligations in the event of recourse to guarantees. Let`s take the simple example of three members of a family business set up as a limited liability company that lends $3 million to a bank to finance the purchase of commercial real estate. The loan is secured by a mortgage on the property and the three members of LLC guarantee the entire loan jointly and several times personally. One LLC guarantor holds a 60% interest in LLC, another 30% and the third LLC member 10%. The loan is late and the lender requires payment of the LLC`s membership guarantees. The LLC member guarantee provider, which holds an interest rate of 10%, pays the total credit balance and then asks the other guarantors to pay their fair shares in the defaulted loan. How much will each remaining LLC guarantor have to pay? Questions The guarantors of family entrepreneurs should consider deciding on the structuring of a contribution agreement: even in the absence of a contribution agreement, the LLC`s fee-based guarantee must be reimbursed for a portion of the amount paid to the lender, in accordance with common law principles.
It is surprising that in the absence of a contrary agreement (subject to many exceptions and qualifications), guarantors are obliged to settle with each other, so that each pays an equal percentage of the total amount paid by the guarantors, even if they may have totally different ownership shares in the borrower. In the example above, any non-paying guarantor of the LLC would be required to pay the CLL guarantor one-third of the amount he paid to the bank without a contribution agreement setting the guarantors` payment obligations in accordance with the ownership of the members of the LLC, so that each of the LLC`s three guarantees would ultimately bear one-third of the loss. All LLC member guarantees would be entitled to a full repayment by the LLC, but as the loan has been delayed, the LLC is probably not in a position to pay what it owes. These issues can arise in many contexts beyond guarantees. They exist in all situations where multiple parties are responsible for the same debts or provide guarantees. Here is a link to an article that examines the topics in much more detail: After the Guarantor Country.