Liabilities of the Firm, Member Guaranties, and the at Risk Rules: Some Practical and Policy Considerations

50 Pages Posted: 31 May 2004 Last revised: 26 Aug 2015

See all articles by Bruce A. McGovern

Bruce A. McGovern

South Texas College of Law Houston


Start-up ventures commonly borrow to fund operations and often incur tax losses in their initial years. If a venture is organized as a firm that is subject to subchapter K or subchapter S of the Internal Revenue Code, such as a limited partnership, limited liability company, or subchapter S corporation, then the firm's members are generally able to offset their share of the firm's losses against income from other sources. One limitation on this ability is that a member can utilize her share of the firm's loss against income from other sources only to the extent she is considered at risk in the firm's activity at the close of the taxable year. A member is generally considered at risk for the amount of any cash and the adjusted basis of any property she contributes to the firm and, in addition, for any amounts borrowed in connection with the firm's activity for which she is subject to personal liability. This Article considers the extent to which firm members who are entitled to limited liability under state law, but who personally guarantee a liability of the firm, are considered at risk by virtue of the guarantee. The Article discusses the judicial and administrative development of the law as to when a limited partner is considered at risk as a result of guaranteeing a partnership liability and applies the general principles derived from this discussion to guaranties by members of other business organizations. The Article demonstrates that, despite a significant amount of litigation between taxpayers and the government, ambiguity remains with respect to very basic issues concerning when a firm member's guarantee will increase the member's amount at risk. The Article offers guidance on structuring guarantees and concludes with some observations on the many policy questions raised by the at risk rules.

Keywords: At risk, guaranty, guarantee, liability, limited liability company, limited partnership, partnership liability, Subchapter K, Subchapter S

JEL Classification: H26, K39

Suggested Citation

McGovern, Bruce A., Liabilities of the Firm, Member Guaranties, and the at Risk Rules: Some Practical and Policy Considerations. Journal of Small and Emerging Business Law, Vol. 7, pp. 63-112, 2003, Available at SSRN:

Bruce A. McGovern (Contact Author)

South Texas College of Law Houston ( email )

1303 San Jacinto Street
Houston, TX 77002
United States
(713) 646-2920 (Phone)
(713) 646-1766 (Fax)

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