Treat Your Business Like a Business or Business Creditors May Collect Against Your Personal Assets

By Michael Safren, Esq.

Owning a small business can be fun, challenging, and hopefully profitable.  You’ve worked hard to build and grow your business.  In fact, it can feel like an extension of yourself.  However, if you want the benefit of shielding your personal assets, such as your home, your bank & investment accounts, your vehicles, and even your future income, from business creditors and business obligations, it is important to treat your business like a business. Regardless of the type business - retail, service, or  real estate - if you want to protect your personal assets from business creditors, you must follow the proper steps to establish and maintain the corporate form.

The first step is to make sure you create and register a legally recognized business entity. In Washington, there are several recognized business entities that separate your business liabilities from your personal obligations. 

Once you’ve created the formal entity, you need to make sure you maintain the corporate form of the business entity so you can continue to shield your personal assets from the business’s obligations.  If you fail to do so, a business creditor can ask the Court to set aside the corporate form and subject your personal assets to the business liabilities under the legal concept called  “Piercing the corporate veil.”

Maintaining the corporate form encompasses several responsibilities.  One such responsibility is to keep the business current on all required filings.  In Washington, registered business entities must file an annual report with the Washington Secretary of State.  Failure to do so will result in an administrative dissolution of the business.  An administratively dissolved business can be precluded from seeking legal remedy from a Court and creditors may use the business’s dissolved status to attach liability to any personal assets for obligations incurred while the business was dissolved.

Another key aspect of maintaining the corporate form is to keep your business and personal assets separate.  At a minimum, the business should maintain and use a separate bank account under the business’s name.  Business income and expenses should be accounted for and paid through the business accounts and not from the owner’s personal accounts. 

Further, owners should not pay for personal expenses such as groceries or family vacations from the business accounts.  Nor should owners treat the business accounts as a personal “piggy bank” and give themselves interest free loans from the business, or apply for loans under the business name for personal assets.   Washington Courts have held that when  an owner "dominates and controls a corporation that 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. 

The attorneys at the Law Offices of Jenny Ling, PLLC, are experienced in helping businesses observe and maintain the corporate form.   We can advise you and help you establish and employ best practices in your business that help you avoid liabilities and complications.  We can serve as your business’s registered agent and assist you in properly registering and maintaining those required registrations.  We can also help you draft and review any contracts you are asked to sign so that you do not voluntarily waive the corporate shield to a creditor by signing a personal guarantee.  Further, we can help you establish a succession plan for the business so that the business can endure and prosper long after you retire or exit the business.

Owning a small business can be a lot of work but it can also be a lot of fun.  It is essential that you properly care for and maintain your business so that it can continue to be a successful and profitable vehicle for you, your family and future generations.

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