Avoiding the Imposition of Personal Liability for Limited Liability Companies

Post Authored by Brian Bentrup

Piercing the veil of an LLC may prove more difficult than a corporation, because the Illinois Limited Liability Company Act may specifically prohibit courts from piercing the entity to reach its members and managers. Specifically, 805 ILCS 180/10-10 provides:

(a) Except as otherwise provided in subsection (d) of this Section, the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager . . . .

. . .

(d) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if:

(1) a provision to that effect is contained in the articles of organization; and

(2) a member so liable has consented in writing to the adoption of the provision or to be bound by the provision.

As the statute states, members and managers are not liable for company debts or obligations unless either (1) the articles organizing the company specifically make them liable, or (2) they consent in writing to liability.

Illinois courts have struggled to pierce the veils of LLCs because the statute seemingly prohibits it. Illinois case law has largely arrived at the same conclusion while citing the statute, though not all have. Therefore, an LLC may provide greater protection against personal liability than corporations.

Limited liability companies have been in existence in Illinois for far less time than corporations. Accordingly, the law is far less settled in terms of personal liability. Nevertheless, it is essential that entities and their controlling individuals ensure that the LLC form is maintained, in order to avoid conflating the separate identities of the LLC and those who manage or own it. Thus, care should be taken so the LLC does not appear to be the alter ego of the member, or as an entity disguised as the individual’s personal business.

Case Study

A client recently wanted our firm to handle the corporate governance and maintenance for his limited liability company. When he learned about the corresponding legal costs, he expressed hesitation.

The client wanted to do the annual reports on his own to reduce costs. We told him that he could certainly do his own annual reports. However, we would need to be removed as the registered agent.

We cautioned that he would lose the benefit of privacy protection because his name and address would appear as the registered agent on the Illinois Secretary of State’s website. Similarly, we advised that the responsibility for compliance with all corporate formalities would be exclusively his. This would include not only preparing the annual reports but also documenting any and all activities of the LLC. The client was duly warned that the failure to adhere to these formalities could result in a creditor piercing the corporate protections and suing the client as an individual.

The client ultimately decided to have us do his corporate work when faced with the parade of horribles that could result from improper corporate maintenance. In the final analysis, $150 per year is a small price to pay for the peace of mind that comes with a professionally-maintained corporate form that is insulated from personal liability.

As a general matter, individuals should be aware of the risks associated with acting as the registered agent if that is not part of the individual’s regular business activity. The potential personal and corporate liability resulting from the individual’s acts and/or omissions, along with the loss of privacy, are significant concerns that should not be disregarded. Individuals should speak with a trusted attorney to avoid these risks.

Conclusion

Forming a separate and legally distinct business entity, such as a corporation or LLC, is not sufficient alone to protect against liability. Creditors and claimants may pierce the corporate veil as a remedy to hold individuals personally accountable for the debts and liabilities of the business entity. Officers, directors, managers or members can also be found personally responsible for any malfeasance.

Statutes and case law set the standard for veil piercing. However, the test is rarely simple or straightforward. The best practice is to establish corporate formalities and strictly adhere to them. The Illinois LLC Act suggests a limited liability company insulates better against personal liability than a corporation for business entity debts. Further, the Illinois LLC Act prohibits piercing an LLC’s veil, although Illinois case law is far from settled.

Corporations are far more susceptible to veil piercing and case law establishes that even non-shareholders, non-directors, and non-officers of the corporation may be held personally liable. Care should be taken to ensure that the entity is a functional entity separate and apart from its shareholders or members. The foregoing notwithstanding, all or specified members may be subject to personal liability if the articles of incorporation so provide and the member has consented in writing. Nevertheless, any business entity should avoid the 11 factors listed above. Therefore, it is crucial to follow the steps outlined below. If there are any concerns about whether your business entity has adequately maintained the corporate form, we recommend speaking with an experienced attorney to avoid the imposition of personal liability.

Practice Tips

  1. Undertaking necessary formalities. Corporations have strict formalities they must follow, and while LLCs do not face the same requirements, many of the same steps are advisable.
    • Create and regularly update bylaws, issue shares of stock to owners (shareholders) and maintain a stock transfer ledger, hold both an initial, and later, annual, meeting for both directors and shareholders, undertake any annual filings required by the state of incorporation in a timely manner, pay the necessary filing fees, and pay corporate taxes.
    • Undertake the annual filings required by the state of incorporation in a timely manner and pay the necessary filing fees. Recommended formalities include creating and regularly updating an operating agreement, issuing membership certificates to owners, keeping a membership transfer ledger, and holding both initial and annual meetings of the members (and managers, if your LLC is manager-managed).
  2. Documenting your business actions. Document the major business decisions and the major meetings you hold. For example, sign and keep contracts your company enters. Document that you held the initial and annual meetings of directors and shareholders (corporations) or members/managers (LLCs) and keep the meeting minutes from each of these meetings. Keep formal business documents for at least seven years.
  3. Don’t comingle business and personal assets. Keep business assets separate from the assets of the owner(s). Have a business checking account and business credit card and only use them for business expenses. Also keep assets, such as equipment and property, separate.
  4. Ensure adequate business capitalization. Your business will need money and the equipment and items necessary both to start and continue operations. There are many ways to do this: through your own money, accepting money from others and making them business owners, or through a business loan. Whatever your approach, without adequate capital, your business will not survive. Keep in mind this capital needs to be designated to your business and not to you.
  5. Make your corporate or LLC status known. Create business cards that display the name of your corporation and LLC. Make purchases and pay invoices via a business checking account or credit card. Create invoices in the company name to send to your clients. Also, any contracts, leases and/or documents you sign should be in the company name.

About the Author:

bentrup picBrian Bentrup is a graduate of Loyola University Chicago where he triple-majored in Economics, Political Science, and Psychology. In 2015, he obtained his law degree from The John Marshall Law School. In law school, Brian was selected to be an extern for the Honorable Laura C. Liu in the Mortgage Foreclosure and Mechanics Lien Division as well as the Illinois Tenant Union.

Brian joined Pluymert, MacDonald, Hargrove & Lee, Ltd. in January 2018. His practice includes estate planning, probate and trust administration, and residential and commercial real estate. Brian also focuses on guardianships of minors and disabled adults and has been named to the approved Guardian ad Litem lists for Cook County, DuPage County, Kane County and Lake County. Brian dedicates time to pro bono work with Chicago Volunteer Legal Services representing or advocating on behalf of minors and disabled adults.

Brian is a member of the American Bar, Illinois State Bar, Cook County Bar, DuPage County Bar, and Chicago Bar Associations. He is also a member of the Justinian Society of Lawyers and the Phi Alpha Delta Law Fraternity.

Brian is a regular writer for the Chicago Bar Association’s @theBar blog where several of his articles have been published on estate planning and the minimization of tax liability.

Brian is licensed to practice in Illinois and Missouri. When not practicing law, Brian enjoys spending time with his wife, daughter and son, and exploring new and different culinary experiences.

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