Making the Most of Your Limited Liability Company

By Michael Safren, Esq.

Congratulations!  You’ve started a business!  Hopefully you’re following your dreams while also finding a way to support your family.  In considering the most appropriate business structure, you should understand different business structures offer different levels of protection in terms of your ability to shield your personal assets from business liabilities.  Remember that only certain business structures can protect your personal assets from creditors.  Here is a link for information about different entity choices and their benefits and considerations.

Benefits of a Limited Liability Company

In Washington, a Limited Liability Company (LLC) is a business structure that offers liability protection for you as the owner and operator of your business.  The law generally holds that an LLC, properly formed, is a separate entity from its members.  That means that if your business has unpaid debts, obligations, or is sued, your personal assets such as your home, your bank account, and future wages are protected from any liability.

Losing the Ability to Shield Your Personal Assets from Business Liabilities

However, it is possible to lose this protection. Generally, there are three ways that a business owner can lose the ability to shield their personal assets from business liabilities: signing a personal guarantee; failure to pay certain taxes or engaging in civil wrongdoing; and a piercing of the corporate veil.

1.  Signing a personal guarantee. 

A personal guarantee is an agreement whereby you, the owner, agree to be personally responsible for the debts and obligations for the business in the event that the business is unable to pay or fulfill the obligation. By signing the personal guarantee, you are agreeing to by-pass the asset protection ability of your LLC and are putting your personal assets at risk for that creditor.  Often applications for loans, business lines of credit, and business credit cards will contain or require a personal guarantee.  It may still make sense for you to sign the personal guarantee to gain financing for your business but you should discuss this with an attorney to ensure you fully understand the implications of that choice.

2.  Failure to Pay Certain Taxes or Engaging in Civil Wrongdoing

If your business has employees, certain taxes such as payroll taxes, which are held and remitted to the federal or state government are considered to be held in trust for the benefit of the employees and if these taxes are unpaid, then the owner(s) of the business can be personally liable for the obligation.  Further, civil wrongdoing such as intentional wage theft, civil conspiracy, and certain violations of Washington’s Consumer Protection Act can cause the owner(s) to be responsible for the liabilities associated with these wrongdoings regardless of the corporate form.

3.  Piercing the Corporate Veil

“Piercing the corporate veil” is a legal concept that allows a Court to remove the corporate shield for an owner’s personal assets and allow creditors to “pierce” the “veil” that separates the business’s liabilities and the owner’s personal assets. 

How can your corporate veil be pierced?

In Washington, RCW 25.15.061 empowers the court to make members, i.e. the owners, of an LLC personally liable for any act, debt, obligation, or liability of the limited liability company.  In Washington, the corporate veil may be pierced if “(1) the corporate form was used to violate or evade a duty, and (2) the corporate form must be disregarded to prevent loss to an innocent party.”  “{S]uch abuse typically involves 'fraud, misrepresentation, or some form of manipulation of the corporation to the stockholder's benefit and creditor's detriment.’” Wash. Water Jet Workers Ass'n v. Yarbrough, 151 Wn.2d 470, 503, 90 P.3d 42 (2004).

The Court has found these factors present in the following circumstances:

1. Failure to maintain the formalities the LLC.  If the business does not follow the required formalities to operate and function as a separate business entity, then the Court may pierce the corporate veil to prevent evasion of a duty to a creditor.  Examples of these failure include failures to maintain the corporate form by neglecting to file the necessary documents to form the LLC, and/or neglecting to file the appropriate documents every year, failure to observe the corporate formalities by not having an operating agreement or not fulfilling the business duties outlined in the operating agreement, or consistent failures to use the business form when conducting business.   Consult with an attorney to ensure that your filings are correct,  that your operating agreement is in place, and that you are observing the corporate duties imposed by the operating agreement.

2. Not Separating Business and Personal Assets/ Co-mingling funds.  If the business does not keep and maintain its assets separate from the owners of the business, the Court may find that the business is so dominated and controlled by an individual or individuals such corporation is his alter ego, a court is justified in piercing the veil of corporate entity and holding that the corporation and private person are one and the same.” Standard Fire Ins. Co. v. Blakeslee, 54 Wn. App. 1, 5, 771 P.2d 1172 (1989) (quoting Pohlman Inv. Co. v. Va. City Gold Mining Co., 184 Wash. 273, 283, 51 P.2d 363(1935)).  Courts have set aside the corporate shield and imposed obligations upon the LLC’s owners when they have co-mingled funds, taken loans from the business that were not repaid, paid personal obligations and liabilities with business funds. Consult with an attorney to ensure that you are adopting the best practices to keep business and personal assets separate.

3. Intentionally Undercapitalizing the Business.  If an owner intentionally undercapitalizes a business, the Court may by-pass the corporate form and impose personal liability upon the owner.  For example, if during a lawsuit against the LLC, the owner were to transfer all LLC’s assets to another LLC or to himself personally to avoid having to pay the judgment, the Court may pierce the corporate veil to make the owner personally responsible for the judgment.

Other common mistakes people make with their LLC

Not Keeping Businesses Separate from Each Other

The time and expense required to create and maintain an LLC make tempt you to run multiple businesses using the same LLC.  For example, you might form an LLC for your housecleaning business and then decide to run your Etsy business using the same LLC.  That may feel like the easiest choice, but it does put both your businesses at risk.  Any creditor that has a case against one of your businesses could attempt to get payment from the assets of your other business.

If you own rental property, hopefully you’ve created an LLC to hold that rental property.  But you need to make sure that you have a separate LLC for each of your rental properties.  If you use one LLC to own multiple rental properties, each property is then subject to liability for the liabilities of each other property.

Making the most of your LLC

The best way to make sure your LLC is providing the maximum amount of protection for you and your assets is to have an experienced attorney help you form and maintain that LLC.  General counsels aren’t only for Fortune 500 companies.  Having a strong relationship with an experienced business attorney can help you navigate the legal requirements to help your business grow. 

If you aren’t sure if your LLC is providing the maximum protection you need, or if you need an LLC for your business, give our office a call.  We want to help you make a plan to make the most of your business!

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on business, real estate, and civil litigation.