Piercing the Corporate Veil: What You Need to Know!

Virtually all businesses today are operated using either a corporation or a limited liability company. These structures are used primarily for one reason: limited liability. If owners and their assets were exposed to the multitude of claims of creditors, very few would venture to start a business. Limited liability insulates the personal assets of the owners from the claims of their creditors. The structure has provided a framework whereby individuals are willing to engage in a business venture knowing that their personal assets are not at risk.

However, simply filing articles with the Secretary of State is not enough to maintain the limited liability protection. If the business is not managed in a proper way and consistent with formalities, creditors may seek to collect in their claims or otherwise pierce the corporate veil and seek to recover from the owners of the business. This is known as piercing the corporate veil.

When determining whether to pierce the corporate veil, courts had previously looked to see whether or not owners are comingling business assets with their personal assets; whether shareholders followed the proper corporate formalities (such as holding shareholder and director meetings, issuing certificates representing shares of stock, and executing resolutions authorizing corporate action). In the situation where the formalities are not being observed, the court would generally reason that the owners are not entitled to the limited liability protection and therefore hold that the business was being operated as either a sole proprietorship or a partnership. Under Illinois law, the owners of a sole proprietorship or partnership are jointly and severely liable for the debts of the business. Such law on the piercing of the corporate veil have been expanded by the Buckley decision.

A recent ruling the by Illinois First District Appellate Court, Buckley v. Abuzir , 2014 III. App. (2st) 130469, expands the Illinois court’s ability to pierce the corporate veil and impose personal liability on non-shareholders of a corporation. Buckley establishes that interested parties of a corporation, including shareholders, officers, or even non-shareholders, may be subject to veil piercing if the two-prong veil-piercing test is satisfied.

In Buckley v. Abuzir , Buckley received a judgment of almost $500,000 against Silver Fox Pastries, Inc. Unable to collect from the defunct corporation, Buckley sought to pierce the corporate veil to collect from Abuzir. Abuzir himself was not directly involved with Silver Fox as an officer, director or shareholder. However, he funded Silver Fox and made business decisions for the corporation, including negotiating the corporation’s lease and arranging accounts and sales agreements. Abuzir’s sister was Silver Fox’s owner and his brother-in-law was Silver Fox’s president and registered agent.

Illinois courts will now pierce the corporate veil when a two-prong test is satisfied: (1) there is such a unity of interest and ownership that the separate personalities of the corporation and the parties who compose it no longer exist, and (2) circumstances are such that adherence to the fiction of a separate corporation would promote injustice. Tower Investors, LLC v. 111 East Chestnut , 864 N.E.2d 927 (1st Dist. 2007).

The Buckley court came to a new and wide-reaching conclusion in its review of the first prong of the veil piercing test. Illinois courts will allow equitable ownership to satisfy the first prong. This means that even if you are not a shareholder, officer, director or employee, you may still be liable for a company’s debts.

If you operate a business without liability protection or would like to speak with an attorney about protecting yourself from personal liability for your company’s debts, please contact Theodore M. McGinn at (847) 705-5555 or tmcginn@lavellelaw.com.