One of the many advantages of forming a corporation, LLP, or LLC is limited liability. Limited liability means that debt collectors cannot seize a business owner’s personal assets to repay the company’s debt obligations. “Piercing the corporate veil” refers to a situation when a court ignores limited liability and holds an LLP, LLC, or corporation’s shareholders, directors, or members personally liable.
Below is a discussion about piercing the corporate veil and how business owners can protect themselves and maintain limited liability. Any business that benefits from having limited liability should consult an attorney to review the business’s particular needs and circumstances.
HOW CAN BUSINESS OWNERS AVOID HAVING THEIR CORPORATE VEIL PIERCED?
Illinois courts look to four factors when they consider piercing the corporate veil. These factors include (1) the failure to maintain adequate corporate records or to comply with corporate formalities, (2) commingling of funds or assets, (3) undercapitalization, and (4) one corporation treating the assets of another corporation as its own.
Business owners can avoid having their corporate veil pierced by complying with the four factors listed above. First, corporations should maintain adequate corporate records and comply with corporate formalities. Corporations should perform annual filings and maintain internal formalities by having corporate bylaws. For example, if a company’s bylaws require the directors’ meet annually, but the directors do not meet each year, it is more likely that a court will pierce the corporate veil. Second, business owners should not commingle personal and company assets. To prevent creditors from piercing the corporate veil, business owners must maintain a separate bank account, file separate tax returns, and use corporate assets only for corporate purposes. Third, corporations must avoid undercapitalization. Inadequate capitalization means minimal capitalization in relation to the nature of the corporation and the risks the corporation takes on. The level of capitalization should match with the reasonably foreseeable risk of the corporate venture. Lastly, corporations should keep the assets of multiple corporations separate. When several related affiliates or numerous companies are acting under the umbrella of one company, corporations should keep all corporate assets separate from one another. By ensuring their business complies with these four factors, business owners can reduce the risk of having their corporate veil pierced.
Final Thoughts
Although limited liability is a primary reason business owners choose to form a business as an LLP, LLC, or corporation, this limited liability shield can be pierced, and creditors can come after business owners’ personal assets. To protect personal assets, business owners should contact a business attorney to ensure they are not engaging in any activities that would cause a court to pierce the corporate veil. As corporate veil piercing is a vast area of the law, any business owner who benefits from limited liability should consult an attorney to ensure they are not putting their personal assets at risk due to corporate veil piercing.
For more information on this article or business law in general, please contact Albee Law PC at (312) 279-0115 or by email at info@albeelaw.com.
