Your Business Entity Is a “Person.” Treat It Like One

One of the first concepts taught in business law is that a corporation, limited liability company, nonprofit, or other legal entity is treated by the law as a separate “person.” Lawyers often call this a “legal fiction.”

Of course, an LLC is not literally a person. Walmart does not physically exist the way an individual person exists. It is a network of employees, shareholders, officers, directors, contracts, assets, liabilities, and operations. But the law treats Walmart as a separate legal person. That means Walmart can sue, be sued, own property, enter contracts, maintain bank accounts, incur debt, and be held liable for its own obligations.

The practical benefit of this structure is liability protection. If Walmart is sued, the plaintiff generally seeks recovery from Walmart’s assets—not from the personal home, personal bank account, or personal property of Walmart’s CEO. That same basic principle applies to small businesses, LLCs, and closely held companies.

But that protection is not automatic in every practical sense. Business owners must actually treat the entity as separate.

That means your LLC or corporation should have its own bank accounts. It should have its own credit cards. Its contracts should be in the company’s name. Its income should be deposited into company accounts. Its expenses should be paid from company accounts. The business should have clean books and records. Personal expenses should not be run through the business, and business expenses should not casually be paid from personal accounts.

As one of my law school professors put it, your entity is your “pretend friend.” If you want the law to respect the separation between you and your company, you need to act like that separation is real.

Failing to do so can create serious problems.

This issue often arises in small business disputes. In one business litigation matter our firm handled, two owners operated a company together but did not consistently use accounts in the company’s name. At times, business expenses were paid from personal accounts. Company revenue and obligations were not always cleanly separated from personal finances. When the owners later had a falling out, each accused the other of misusing company funds and resources.

The result was a mess.

Because the owners had commingled personal and business finances, it became difficult to determine what belonged to the company, what belonged to each owner personally, what qualified as a legitimate business expense, and what may have been improper. The company had to incur significant expense for an internal audit simply to determine where the money went. Both owners were exposed to potential claims. The dispute became more expensive, more complicated, and more difficult to resolve because the business records were not clean.

This problem is not limited to lawsuits between business partners.

Commingling funds can also create issues when a business owner wants to sell the company. A buyer will want to know the company’s true income, expenses, debts, and value. If the owner has mixed personal and business finances, valuing the company becomes much more difficult. In some cases, it can make the business look less profitable, less organized, or less trustworthy. It can also create disputes after a sale if the buyer later claims that the company was misrepresented or overvalued.

The bottom line is simple: treat your business entity as separate from yourself.

Your company should have its own bank accounts, credit cards, financial records, contracts, and operations. Keep business money in business accounts. Keep personal money in personal accounts. Document transactions. Avoid using the company as a personal wallet.

An LLC or corporation can provide important protection, but only if the owner respects the entity’s separate existence. If you blur the line between yourself and your company, you may be creating the exact kind of liability and expense the entity was supposed to help you avoid.