Limited personal liability is the primary reason most business owners incorporate their business. A corporation is a legal entity separate and apart from its Shareholders, who are not ordinarily liable for the corporation’s debts and obligations.
It is simply not enough to form a corporation…
However, limited liability is not absolute. It is simply not enough to form a corporation to avoid personal liability. Under certain circumstances, Illinois courts have “pierced the corporate veil,” and held the Shareholder of a Corporation personally liable for corporate obligations. Even if the Shareholder ultimately prevails in court, incurring substantial legal fees often will be the cost of “winning.”
Factors Illinois courts have considered when deciding whether or not to pierce the corporate veil and hold a Shareholder personally liable for a corporate obligation include:
- The absence or inaccuracy of corporate records, including but not limited to, By-Laws and Annual Minutes of the Shareholder(s) and the Board of Director(s) of the Corporation, as well as corporate resolutions approving all major corporate action.
- The failure to observe corporate formalities, such as signing corporate documents as President.
- The failure to issue a stock certificate.
- Using the exact same corporate name (including Corporation, Incorporated, Company or Limited, or the abbreviation of one of these words, which puts people on notice that the business is a corporation) on all corporate stationary, business cards, bank accounts, checks, letterhead, advertising, website and social media.
- Maintaining separate bank accounts and credit cards for the Corporation and Shareholder, and not comingling funds between the two.
…the shareholder was personally liable for an amount in excess of $1,200,000.
Piercing the corporate veil is a real-world concern. In a 2005 Illinois case, the court pierced the corporate veil, and found that the shareholder was personally liable for an amount in excess of $1,200, 000.
Note that the above is for information purposes only, and shall not be considered legal advice. For legal advice, you should consult with an attorney.
- Shareholder Personal Liability Audit - September 12, 2014