Q: If my agency operates as a corporation or limited liability company, do I have to personally guarantee its obligations to ARC? If not, is it appropriate to ask my agency's independent contractors that operate as corporations to provide personal guaranties of the corporation's liability to ARC or other suppliers?
A: The basic concept of the corporation or limited liability company (an "LLC") is that creditors of the corporation or LLC can only get the assets of the corporation or LLC and not the assets of you, as the owner. By providing a personal guaranty to a creditor, you are saying that the creditor can get your personal assets, too.
If you are the owner of a corporation or LLC, you are naturally generally reluctant to provide a personal guaranty to anyone. The trouble is that some potential creditors will do business with your agency only if you provide one.
Contrary to popular belief, ARC does not require a personal guaranty from the owners of a travel agency at startup or in the course of business, except in four unusual circumstances which lead ARC to believe that your agency is a financial risk to the airlines.
First, ARC requires a personal guaranty if ARC makes a demand for immediate payment after you have a bounced draft, unreported sales, improperly reported sales or unexcused failure to submit a sales report. If any of these things happens to you, the only way to avoid having to sign a personal guaranty is to fix the problem before ARC catches it and sends you a notice. Once ARC makes a demand for payment, it is generally too late to avoid having to sign the guaranty.
Second, ARC requires a guaranty when it makes you increase your bond or letter of credit after you have had too many dishonored drafts.
Third, if ARC pulls all of your agency's stock and plates because ARC believes that you pose a "clear and present danger" of loss to the airlines, you can only get your appointment back if you post the guaranty and win an appeal to the travel agent arbiter.
Fourth, ARC can (but does not have to) require a personal guaranty from the buyers and sellers of an agency if they close on the acquisition before ARC approval of the change of ownership. However, the guaranty is released when ARC approves the change.
In addition, the travel agent arbiter has the power to require that you sign a personal guaranty at any time for any reason, as part of his decision in a case. For example, if ARC files an arbiter complaint to have your agency canceled for having too many bounced drafts, the arbiter might let you keep your appointment, but only if you sign the personal guaranty.
If your agency hosts independent contractors, it is probably a good idea for them to operate as corporations or LLCs, as it makes it somewhat less likely that the Internal Revenue Service or state agencies will reclassify the contractors' owners as your employees. However, I strongly recommend that you require the owners to sign personal guaranties for debit memos and other supplier liabilities, given the havoc that a rogue or untrained independent contractor can create.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].