Business vs. Personal Assets: A Story of Keeping the Line Clear

Let me tell you about two small business owners—call them Sam and Lisa—who thought limited liability would protect their personal worlds. But their choices turned their business shield into a liability.

Sam's Story: When Lunch Becomes a Liability

Sam was a custom homebuilder in Oregon who formed a single-member LLC to protect himself from lawsuits. One day, a buyer sued the business over construction defects. Initially, Sam assumed his LLC would shield him.

But when the lender dug into financials, they discovered Sam paying personal lunches and utility bills directly from the LLC’s bank account—without documenting it or taking a formal draw. That consistent mixing of funds convinced the court that Sam didn’t treat his LLC as a separate entity. As a result, the veil was pierced—and Sam ended up personally liable for the claim 

Lisa’s Case: The Envelope of Danger

Lisa co‑founded a small LLC to run a café. In the early months, cash was tight so she reached into the business account to pay for a surprise roof repair on her home. She assumed no one would notice.

But lenders saw the unrecorded advances—and to the court, Lisa was using business funds for personal bills. No minutes, no payroll formalities, no documentation. The judge ruled the LLC was Lisa’s alter ego. With the veil pierced, her personal assets were exposed 

Why the Separation Matters—and When Courts Step In

Think of LLCs and corporations as legal armor. As long as you keep your finances clean and follow formalities, personal liability stays outside.

Courts typically look for two things to declare your business a sham:

1. Undercapitalization  - setting up your business with too little funding to meet expected needs.
2. Alter Ego / Commingling - mixing personal and business finances or failing to maintain separate records and corporate formalities 

In another famous multi‑corporation case (NY Crane & JF Lomma), multiple companies shared offices, equipment, email systems—and profits were shifted at will between entities. Despite being separate on paper, the court treated them as one business. The veil was pierced, and the owner was held personally liable for fatal crane accident injuries tied to one of the entities Corporate Direct.

How You Can Guard That Veil: A Story‑Driven Checklist

Imagine your business as a fortress. These are your walls and guards:

• Pay yourself through a formal draw or salary, not random withdrawals.      Document each draw in writing.
• Never pay personal expenses from business accounts, no matter how tempting. Even rent or utilities count.
• Maintain corporate formalities: hold annual meetings, keep minutes, follow      bylaws - even if it's just you 
• Fund your business adequately, especially at startup. Courts look at whether initial capital was sufficient for foreseeable needs 
• Keep your business account strictly business: all income, bills, invoices, and payroll go through it. Personal accounts should never touch business funds.

Conclusion: Draw the Line While You Can

Sam and Lisa thought limited liability meant automatic protection—but courts don’t see it that way when lines blur. Asset protection only works if you actively maintain it. By handling your entity with care, you keep that legal shield strong.

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The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.