Piercing the Corporate Veil in Illinois: Protect Your Personal Assets
Contents
If you formed an LLC and think you can’t be sued for anything related to your business operations, you are dead wrong.
Many founders are unaware that their everyday actions can erode the legal line between themselves and their company, putting their personal wealth at risk.
Forming an LLC or corporation isn’t enough.
You need to know how to use the structure to proactively protect your assets.
This guide provides a clear explanation for business owners on the protection a corporate entity offers, what the “corporate veil” is, and some practical steps you can use to protect your personal assets.
Understanding limited liability
The primary reason to form a corporation or LLC is to create a legal entity separate from its owners. This concept is called limited liability.
It means the business entity itself is responsible for its own debts and legal obligations.
Creditors of the business can pursue the company’s assets, but not the personal assets of its owners, like your home.
While that concept is generally true, there are limits. And they are critical to understand.
If you don’t, you cannot effectively use the entities protect yourself.
Limit 1- Your own negligence
In most circumstances, corporate entities will not protect you from your own negligence.
As a general rule, you will always be responsible for your own negligence.
For example, if you are the owner and you cause a traffic accident while on the job, you will almost certainly be sued personally for the injuries. Even though you were on the job, you are still responsible for your own actions.
Limit 2- Piercing the corporate veil in Illinois
Piercing the corporate veil is a legal doctrine that allows a court to disregard the limited liability protection of a corporation and hold its owners personally responsible for the corporate debt.
When this happens, the legal separation between you and your business vanishes, putting your personal assets on the line.
In Illinois, courts use a two-part test to determine if the corporate veil should be pierced:
- Unity of interest: There must be such a unity of interest and ownership between the corporation and the individual or entity that the separate personalities of the corporation and individual no longer exist.
- Promotion of injustice: Second, it must be shown that honoring the corporate separation would promote fraud or some other injustice.
Things to avoid
To ensure your personal assets remain protected, you must avoid the common mistakes that lead a court to find a "unity of interest."
Here are some of the biggest red flags to look out for.
1. Commingling funds
This is one of the most common and damaging mistakes.
The commingling of funds in a corporation happens when the owner treats the company bank account like their personal bank account.
Business owners need to maintain both business bank accounts and personal bank accounts separate from each other. Using business funds to pay personal expenses makes it much more likely a court will disregard the corporate structure.
A good way to think about this is that the business entity actually is a separate person.
You wouldn’t steal from your neighbor’s bank account to pay for your personal expenses. The same applies to the business.
2. Ignoring corporate formalities
Illinois law sets forth rules that business entities must follow to maintain their corporate protection.
The specifics differ based upon the type of entity, whether corporation or LLC, but in both cases, there are formalities that must be followed.
With respect to corporations, some of those formalities include:
- Maintaining corporate financial records
- Issuing stock
- Holding regular board meetings (at least annually)
- Documenting significant corporate actions through resolutions or meeting minutes
LLCs, on the other hand, are not required to adhere to the strict statutory requirements of corporations. However, LLCs should still:
- Maintain separate financial records
- Document significant actions
- Adhere to all requirements of the operating agreement
3. Inadequate capitalization
A business must be set up with adequate capital to handle its expected debts and operational costs.
If a company is intentionally underfunded from the start, a court may conclude it was never intended to be a legitimate, separate entity capable of paying its own bills.
This is especially true if any of the other factors discussed here are also present.
4. Blurring lines between your businesses
For owners who operate multiple business entities, courts will scrutinize how those companies interact with one another. The legal separation between the companies must always be respected.
The core principle is that each company must operate at "arm's length," meaning it should transact with a sister company just as it would with any unrelated third party. This includes:
- Maintaining separate financial books and records for each entity.
- Never commingling funds between the bank accounts of separate companies.
- Making sure transactions between the companies are properly documented and conducted at fair market value.
When you fail to treat your companies as distinct, a court may view them as a single enterprise, potentially exposing the assets of a healthy business to the liabilities of another.
Discipline creates protection
The limited liability provided by a corporation or LLC is one of the most powerful tools available to a business owner. However, this protection is not absolute.
Proper corporate governance can be a headache, but it is the work necessary to protect the valuable enterprise you are building.
If you are ready to ensure your business is built on a solid legal foundation, our team is ready to help.
Click the button below to get started.
Like the article? Share it on social!
Disclaimer: The information contained in this article has been prepared by Small Business Legal Solutions LLC for general informational purposes only. Nothing in this article is intended to constitute legal advice on any subject matter. The materials in this article are not intended to and do not create an attorney-client relationship. Do not act or refrain to act based on any information contained in this article without first personally consulting with an attorney. Every circumstance is different and must be judged on its own merits.