Just How Good is Corporate Protection?
If you ever have the misfortune of facing aggressive business creditors, you might wonder how easily these business creditors could become your personal creditors. The short answer is that your Washington corporation offers you much protection from creditors, more so than in many other states. The Washington Supreme Court recognized the legitimacy of protecting an owner’s assets with a corporation when it said, “The purpose of a corporation is to limit liability.” This is good news for owners of corporations, but owners should also be aware of situations that could compromise their corporate shield.
In a leading Washington case a small business owner’s corporation and the individual shareholders were sued by a person who lost her arm operating a trim press manufactured by a corporation purchased by the defendants. The multiple corporations owned by the same family made the business organizations complicated, but the Washington Supreme Court clearly set forth the two elements a claimant must prove to set aside the corporate shield and proceed against the owner/shareholders:
- First, the corporate form must be intentionally used to violate or evade a corporate responsibility. This means fraud, misrepresentation, or some form of manipulation of the corporation to the stockholder’s benefit and creditor’s detriment.
- Second, disregarding the corporate protection must be “necessary and required to prevent unjustified loss to the injured party.” The court explained that the wrongful corporate activities must actually cause the creditor’s harm before the court will disregard the corporate protection.
So, the corporation is powerful protection, but it is not absolute. In many cases judges have decided to allow corporate protection only after meticulously reviewing the details of the operations of the corporation.
You can maximize your protection by forming an appropriate entity (a corporation or limited liability company), and then making sure you operate it as a separate and independent entity. This is sometimes easier said than done, especially when you have multiple affiliated corporations or LLCs owned by a single person or a small group. Work with your professional advisors to make sure you are properly operating your company in order to take advantage of the protective corporate shield.
This information is general in nature and should not be relied upon for your specific circumstances. For information, questions, or comments, please contact Douglas J. Engel or Kathryn S. Kumar.