Why should you retain a lawyer to form a corporation or a limited liability company to run your business or manage your properties? Lawyers are too expensive, you say. And, the internet is loaded with “free” forms and advice. Did you know that failing to organize and maintain your corporation/company properly can expose your personal assets, including your residence, vehicles, and bank accounts, to potential creditors?
The corporate veil is a legal term used to explain the separation between a corporation or company and its owner(s). The “corporate veil” is an imaginary barrier which protects your personal assets from the creditors of your business. Simply stated, a properly organized and maintained corporation/company will protect its owners/officers from the liabilities of the business, with a few exceptions. In Illinois, these exceptions can include fraud, conversion, and willful and wanton conduct perpetrated by a corporate officer. I bet the internet never explained this to you.
Also, few business owners realize the creation of the corporation/company is not an absolute shield from the liabilities of the business. Whether you create a corporation or limited liability company, a court may disregard that entity and pierce the “corporate veil” and hold the individual owners/officers of the entity personally liable for the debts and obligations of the business. Piercing the corporate veil is the most litigated issue in corporate law. Although Illinois courts claim to be reluctant to pierce the corporate veil, they do so 42-52% of the time. This is especially true for closely held businesses with less than 5 owners/officers.
Inadequate capitalization and insolvency, the failure to issue stock and to observe the corporate formalities, the absence of corporate records or nonfunctioning officers/owners, the commingling of funds, and the diversion of assets are all factors Illinois courts will consider when determining whether the corporation/company is a mere façade for the dominant owner/officer. All of these factors have legal significance which can be explained by our corporate attorneys at Fornaro Law.
If you are not sure whether your business operation may trigger any of these factors, and thereby subject your personal assets to collection proceedings, you should not hesitate to contact us. In most instances, once the liability is incurred by the business, the individual owners/officers are helpless to prevent a creditor from seeking to hold them personally liable. Being proactive about your corporate/company governance will allow you to better protect the assets you work so hard to acquire. If not, your business may take you down with it.