NORTH BAY - Business owners who agree to loan guarantees can be held personally liable if a note goes into default, and the current economic environment is making it particularly difficult for companies.

In normal times, "a lot of the provisions are just in case," said John Friedemann, a banking attorney and partner with Friedemann Goldberg LLC in Santa Rosa.

But in this market many of those "just in case" scenarios are becoming realities, and to avoid such situations, all borrowers and lenders should be paying more attention to the details in the loan documents than they might normally, he said.

Businesses can protect themselves by forming sole proprietorships, partnerships, limited partnerships, joint ventures, associations, corporations, Subchapter S corporations and limited liability companies, for example.

"The most common types of business entities are ones that provide a limitation on the liability of the business owner for the activities of the business," Mr. Friedemann said.

One reason to use one of these types of entities to own a small business is to control your downside risk.

"But not if the owner has signed a guarantee. In that case, the owner has agreed to be personally liable for certain obligations, and many of the benefits of forming the corporation or LLC are forfeited," Mr. Friedemann said.

So why would anyone want to sign a guarantee?

"If you come into my bank and say you don't want to sign a guarantee, I am wondering what you know that I don't," said Ray Byrne, president and chief executive officer of North Coast Bank in Santa Rosa.

Mr. Byrne said he has often had people come into the bank desiring a loan without signing a guarantee.

"They will say, 'I don't sign guarantees,'" he said. "I point to the door."

He said it should not be up to the bank, which is doing the lending, to take all the risk.

Beyond where a business defaults on a loan due to unforeseen circumstances, there are other things to look out for when signing guarantees, Mr. Friedemann said.

In a partnership situation where there is more than one guarantor, unless specifically written into the contract, any person in the partnership could take out more of a loan for the business and the others would not have to be notified.

This can be a particular problem with silent partners or people who live out of the area of their partners. If a building needed improvements, for example, a partner might go to the bank to get a larger loan. The bank would make the loan if the numbers look good and the other partners would then be liable for the loan if anything were to happen to the business.

"We are going to go for the guy in the partnership with the deepest pockets," said Mr. Byrne.