If you lend money to someone for their business, who has to pay you back?

Whoever signs the note as borrower owes you. If only the business signs, the business is your borrower and its owners usually aren't personally liable unless one of them also signs a personal guarantee. If the owner signs alone in their own name, the owner owes you, even if every dollar went into the company.

That last case comes up more than people expect. Say Maria borrows $25,000 from her uncle, signs a note in her own name, and deposits the money in her company's bank account. If the company folds, Maria still owes her uncle the full balance, because the company never promised him anything. Maria may have her own claim against the company if she documented the transfer as a loan to it, but that's a separate debt between Maria and her business.

Lending directly to an LLC flips the picture. Under Oregon's LLC statute, ORS 63.165(1), "A member or manager is not personally liable for a debt, obligation or liability of the limited liability company solely by reason of being or acting as a member or manager." Other states' LLC and corporation laws work in a similar way. If the only signature on the note belongs to the company, the owner's savings, house, and car sit outside your reach.

Check what kind of business you're dealing with before anyone signs. A sole proprietorship isn't a separate legal person, so a note signed by "Sam's Landscaping" is really a note signed by Sam. A corporation works like an LLC, and its officer signs with a title such as President or Treasurer. If the business name on the note doesn't match the name on file with the state, ask why, because a mismatch is exactly what later invites a fight over who the borrower was.

How the signature block decides who pays

When an owner signs for a company, the wording around the signature carries legal weight. Oregon's version of the Uniform Commercial Code, ORS 73.0402(2)(a), says that if the signature "shows unambiguously that the signature is made on behalf of the represented person who is identified in the instrument, the representative is not liable on the instrument." Most states adopted the same rule as section 3-402.

Get it wrong and the owner can end up on the hook. Under ORS 73.0402(2)(b), if the signature doesn't clearly show a representative capacity, or the company isn't named in the note, the signer is liable to a later holder in due course who took the note without notice that the signer wasn't meant to be liable. Against anyone else, including the original lender, the signer is liable unless they prove the original parties didn't intend it. A clean signature block avoids that argument entirely.

Copy the version that matches your deal. For an individual borrower:

"BORROWER: ______________________ Maria Lopez, individually"

For a company borrower, name the entity first and show the signer's title:

"BORROWER: Harbor Coffee LLC, an Oregon limited liability company. By: ______________________ Jordan Lee, Manager"

For an owner who personally backs the company's note:

"GUARANTOR: For value received, the undersigned unconditionally guarantees payment of this Note when due, including principal, interest, and costs of collection. ______________________ Jordan Lee, individually"

The word "guarantees" matters under the code, too. ORS 73.0419(3) presumes that a person whose signature comes with words showing they act "as surety or guarantor" is an accommodation party, and subsection (2) obliges that person to pay in the capacity in which they signed. Our guide to personal guarantees explains how a guarantor differs from a co-signer.

What happens when the business fails

Here's a full example. You lend Harbor Coffee LLC $30,000 at 8 percent per year on an unsecured note, repaid in 36 monthly payments of $940.09. The shop makes 12 payments, which brings the principal down to $20,785.94, and then closes. After selling its espresso machines and paying other creditors, the LLC sends you $5,000. That leaves $15,785.94 of principal unpaid, plus whatever interest and collection costs the note allows.

The signature block now decides the outcome. If only the LLC signed, you're an unsecured creditor of a company with nothing left, and Jordan owes you nothing personally. If Jordan also signed the guarantee above, you can demand the $15,785.94 from Jordan directly. If Jordan signed only "Jordan Lee" with no title and the note never named the LLC, ORS 73.0402(2)(b) points toward Jordan being personally liable, though Jordan could try to prove you both meant the LLC to be the borrower.

A secured note would have changed the middle step. Had the LLC pledged those espresso machines as collateral, and had you properly perfected that interest, you'd have had a claim on them ahead of unsecured creditors.

Keep the signed note, the guarantee, and a record of every payment together. If you ever have to collect from Jordan, you'll need to prove the amount still owed, and the payment history is what shows the $15,785.94. A bank statement for each payment received is usually enough.

Don't sit on a default while a business winds down. Collection deadlines keep running, and our statute of limitations lookup shows how long you have in each state.

Sources

• ORS chapter 63 (ORS 63.165, liability of LLC members and managers)
• ORS chapter 73 (ORS 73.0402 and 73.0419, Oregon UCC Article 3)