Good Corporate Governance – Revisited
In the June 2010 issue of this newsletter I wrote about corporate governance and how important it is to maintain corporate formalities. The reason for doing so is to avoid a claim of “piercing the corporate veil” should your business run into difficulties. The reason you do business as a corporation or limited liability company is to protect your personal assets from creditors of the business. If you think you can outsmart everyone by forming a company and having others be the shareholders, directors and officers and avoid creditors claims think again. A recent Illinois Appellate Court opinion expanded the ability to pierce the corporate veil and hold an individual responsible.
A creditor of a corporation obtained a judgment against the corporation. It turned out to be non-collectible against the corporation so a new action was instituted to pierce the corporate veil and hold an individual responsible. However, this individual was not a shareholder, director, officer nor employee of the corporation. Upon being served with a summons he made a motion to dismiss and the trial court granted it. The Appellate Court reversed. The facts showed that the defendant’s sister owned all the stock in the corporation and she and her husband were the directors and officers and registered agent for the corporation. However, the defendant provided the funds to start up the business, negotiated the corporations lease and arranged sales agreements. It was alleged that no corporate formalities were followed such as issuing stock, holding meetings of stockholders and directors nor were dividends ever paid. The creditor claimed that the named individual exercised control over the corporation to such a degree that separate personalities of the corporation and individual did not exist.
The Appellate Court in finding that a valid claim for piercing the corporate veil was stated focused on the individual’s domination of the corporation. The Appellate Court stated “it would elevate form over substance to allow the defendant to avoid personal liability merely because he has avoided owning stock in his own name and assuming a corporate title such as officer or director.” What counts is if you are the “principal figure” in the corporations dealings with others. Accordingly, lack of status as a shareholder, director, officer or employee is not going to preclude piercing the corporate veil if you are in fact the person “in charge” and calling the shots even though you do so behind the scenes.
As I advised in my June 2010 article good corporate governance is of critical importance and should be strictly followed. You don’t want your personal assets subject to a “veil piercing” claim. It’s never advisable to think you can outsmart everyone. As this Appellate Court decision shows being the power behind the scenes is not going to shield you from personal liability. For a nominal yearly fee we maintain our clients corporations and LLC’s. If we are not already providing this service for you, I suggest you consider having us do so.