Understanding Piercing the Corporate Veil in Chicago
Sometimes, it is necessary to view a company as its own entity, separate from its officers and owners4 min read
Sometimes, it is necessary to view a company as its own entity, separate from its officers and owners. This legal concept is referred to as "piercing the corporate veil," and it is important for Chicago-based companies and business owners to understand this concept in order to best protect their investments.
Piercing the corporate veil refers to the ability of courts to "pierce" the shield of limited liability provided by a corporate entity and find that a business' owners or directors are directly responsible for company-related debt or obligations. This means that in certain instances, business owners or other entities may become liable for debt or other financial obligations created by the company.
The concept of piercing the corporate veil is an important legal tool for Illinois courts. By examining each situation on a case-by-case basis, courts can ensure that individuals in responsible positions are answerable for the company's actions and can be held liable for its debts, if appropriate.
In this article, we will discuss in further detail the concept of piercing the corporate veil. Specifically, we will take a closer look at when and why Illinois courts may pierce the corporate veil, the factors considered by courts in making this determination, and the potential consequences of piercing the corporate veil.
When and Why May a Court Pierce the Corporate Veil?
Courts typically only consider piercing the corporate veil in cases of extreme disregard of the entity separateness theory. Typically, this means that the court must find significant evidence of misconduct, negligence, or fraud on the part of the company's owners, directors, or other responsible individuals in order for piercing the corporate veil to be an option.
The most common example of severe disregard is when individual owners or directors fail to comply with corporate formalities, like keeping company funds separate from personal funds, signing contracts properly account for assets, and adhere to the other rules and regulations that are required of companies. Additionally, cases generally require strong evidence of significant deviation of the normal corporate behavior, such as manipulating company structure or authority to evade obligations or control, or the misrepresentation of the company's independence.
Factors Considered by the Court in Piercing the Corporate Veil
All piercing the corporate veil decisions come down to the individual facts of a particular case. However, some general factors that courts must consider include:
The incorporation of the corporation
The observance of corporate formalities
Undercapitalization
The intermingling of personal and corporate funds, assets, books, and records
The failure to separate the business identity from the individual identity of the owner or owners
The failure to maintain corporate existence
The misuse of corporate assets
Whether the corporation is used as an instrumentality or facilitation of fraud
When examining these factors, the court must look at the totality of the circumstances and determine if there has been a significant breach of corporate separate entity theory.
Potential Consequences of Piercing the Corporate Veil
When and if courts decide to pierce the corporate veil, they may impose a number of different consequences. These could include personal liability for debts, an individual’s loss of the protections provided by the corporate entity, personal responsibility for any contracts created by the corporation, the assessment of fines and penalties (such as civil fines or criminal penalties), and more.
For example, the court could order the responsible individual to pay any outstanding debt or to return any funds that were fraudulently obtained. The court could also force the at-fault individual to pay any other party that was affected by the wrongful acts of the company.
The outcomes and consequences of piercing the corporate veil will depend on the situation and circumstances of the individual case; however, courts have a number of powers at their disposal and can impose a variety of penalties on the responsible parties.
Where to Find Help Understanding Piercing the Corporate Veil
Understanding and protecting against piercing the corporate veil can be a daunting task. Fortunately, there is help available.
UpCounsel is a platform for legal help that provides access to experienced lawyers who are experts in corporate law. Their knowledgeable business attorneys have an average of 14 years of experience and can help Chicago-based business owners understand the concept of piercing the corporate veil and take steps to ensure that their limited liabilities are protected.
Whether you need a one-time consult or an entire freelance legal department, UpCounsel and its network of attorneys has you covered. From small businesses to the Fortune 1000, groundbreaking companies of all sizes trust UpCounsel and its attorney community to provide high quality, cost-effective legal services.
End thoughts
Piercing the corporate veil is an important tool for providing accountability in cases of negligence and misrepresentation. By understanding how the courts determine whether or not to pierce the corporate veil, businesses and business owners in the Chicago area can better protect themselves from potential personal liability. If you need help understanding piercing the corporate veil and the potential consequences, UpCounsel’s network of experienced attorneys can provide high quality legal services and advice.
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