Never sign personal guarantees for corporate loans; spouses should definitely avoid signing too

2. Never sign personal guarantees for corporate loans; spouses should definitely avoid signing too

Cost: Zero expense. When a bank, supplier, or landlord asks you to sign a “personal joint and several guarantee” or requests your spouse’s signature, pause first. Signing such a document means you voluntarily waive the legal protection that shields personal assets from corporate debts (i.e. the principle of limited liability). Avoid signing if at all possible. If signing is unavoidable, opt for a “general guarantee” and explicitly state the maximum amount you agree to cover. The tough part is that parties often threaten “no loan release without your signature” — you must stand your ground.

In plain terms: What you’re signing is a “joint and several liability guarantee”. If the company fails to repay its debts, creditors can bypass the company entirely and demand repayment from you. Choosing a “general guarantee” means creditors must first sue the company and liquidate all its assets before they can seek any repayment from you. If your spouse also signs the document, both of your personal assets become collateral, effectively nullifying the limited liability protection afforded by a limited liability company.

Benefit: The wording in a guarantee contract essentially translates to “if the debtor fails to repay, you are obligated to pay instead”. For contracts labeled “joint and several liability guarantee”, creditors can skip suing the company and demand payment directly from you. For “general guarantee” contracts, creditors must first initiate legal proceedings against the company and liquidate its assets; only after that can they seek any remaining balance from you. Debts jointly guaranteed by both spouses are treated as joint and several debts, and any subsequent approval by one spouse also renders them jointly liable. Once a spouse signs the guarantee, both parties’ assets become collateral for the debt (nationwide, effective since 2021).

Evidence grade: A

Sources: National People's Congress (2020). Civil Code (Articles 681, 687, 688, 1064). <https://www.spp.gov.cn/spp/fl/202006/t20200602_463888.shtml>

Notes: Most banks require shareholders of small and micro enterprises to sign personal joint and several guarantees when issuing loans. This guideline is not meant to discourage you from taking out loans; rather, it urges you to fully understand what you’re agreeing to before signing. Also, cap the total guaranteed amount within the “affordable loss threshold” specified in guideline 1 (i.e. only risk capital you can afford to lose when starting a business). For general rules governing promissory notes and guarantee contracts, refer to Section 8, Clause 18.