Piercing the Protective Corporate Veil Part 3: Factors 7-9

The last post briefly analyzed the fourth, fifth and sixth of eleven factors that courts rely upon when determining whether an entity is merely an alter-ego of another entity or individual.  in this post, we will explore the next three factors:

7) Division of assets from the corporate by or to a stockholder

Courts do not look favorably upon payments made to an owner that result in a harmed creditor.  This situation can have a strong impact on the court’s decision to pierce the protective corporate veil.

8) Non-functioning of the other officers or directors

This can be an important factor for courts’ analysis when it is determined that officers and directors merely hold their seat and do not actively engage in making company decisions.

9) Commingling of funds

Courts can pierce the corporate protective veil when they determine the occurrence of  a commingling of funds. Commingling occurs when company funds are transferred to a personal bank account or into another business’s bank account (or vice-versa) without a proper accounting as to why that money was transferred for a business purpose.

This post is not intended to be legal or tax advice.  Formeller & Formeller LLP’s Chicago startup attorneys have helped numerous clients form their businesses.  Our skilled Chicago attorneys can help counsel you on avoiding personal liability for your corporation or other limited liability entity’s actions.  Please contact our law firm today for a free legal consultation if you would like to discuss a new business venture or business ownership.

 

Piercing the Protective Corporate Veil Part 2: Factors 4-6

The last post briefly analyzed the first three of eleven factors that courts rely upon when determining whether an entity is merely an alter-ego of another entity or individual.  in this post, we will explore the next three factors:

4) Absence of company records

Courts will often look at whether the corporation or other limited liability entity maintains proper company records.  For instance, the absence of proper corporate tax returns, corporate bank accounts or written contracts which may be deemed to be necessary in order to transact business as a separate entity can be an important factor in a court’s decision to pierce the corporate veil.

5) nonpayment of dividends

Although not the most important factor if countervailing facts exist, courts may still pierce the corporate veil if dividends are not paid.

6) Insolvency of debtor company

When a plaintiff in a lawsuit attempts to sue an individual for a business’ debts, courts generally presume that if the business were solvent, it would pay its debts and that the plaintiff in a lawsuit would sue the business, not an individual.  Therefore, it follows that this factor is often construed in favor of piercing liability protection.

This post is not intended to be legal or tax advice.  Formeller & Formeller LLP’s Chicago startup attorneys have helped numerous clients form their businesses.  Our skilled Chicago business lawyers can help counsel you on avoiding personal liability for your corporation or other limited liability entity’s actions.  Please contact our law firm today for a free legal consultation if you would like to discuss a new business venture or business ownership.

Piercing the Protective Corporate Veil Part 1: Factors 1-3

barrierA Corporation is a separate entity, distinct from its shareholders, officers and directors.  Similarly, other Limited liability Entities are also separate entities from their members and managers.  By forming one of the above-referenced entities, you avoid personal liability from the consequences of the entity’s actions and decisions.  However, courts have held that when a business operates as an individual’s or another entity’s “alter ego,” then the protective veil between individual and entity is pierced, imputing personal liability for the business’s wrongdoing.  When determining whether an entity is merely an alter-ego of another entity or individual, Illinois courts look at eleven factors, none of which are given more or less weight than others.  In this post, we will analyze the first three:

1) Inadequate capitalization

Historically, Illinois courts consider it inequitable to allow shareholders or members to set up sham organizations in an effort to escape personal liability.  When formed, an entity should be adequately capitalized to cover foreseeable expenses and liabilities.

2) Failure to issue stock

In the case of a corporation, if stock is not issued the appropriate time or at all, courts will give this factor some weight in determining whether to pierce the protective veil.

3) Failure to observe corporate formalities

Courts have found several instances of corporations failing to comply with corporate formalities, and thus leading to piercing of the protective veil.  For example, failing to maintain proper registration with the Illinois Secretary of State,  and failing to hold annual meetings.

This post is not intended to be legal or tax advice.  Formeller & Formeller LLP’s Chicago startup attorneys have helped numerous clients form their businesses.  Our skilled Chicago attorneys can help counsel you on avoiding personal liability for your corporation or other limited liability entity’s actions.  Please contact our law firm today for a free legal consultation if you would like to discuss a new business venture or business ownership.

Disclaimer

The purpose of this blog is to deliver news and information that are relevant to our areas of practice. The news and information reported on this blog represent the legal actions of attorneys throughout the United States. Our firm does not claim to represent plaintiffs or defendants in all of the lawsuits, settlements, and jury verdicts reported, only those noted as Formeller & Formeller LLP cases. This blog is not intended to be legal advice. Before considering legal action in a business matter, you should seek counsel from an attorney.