(Note: Though this piece was written with Illinois law in mind, its general premise holds true no matter where a business is incorporated or organized.)
When people begin their new business ventures, they are often advised to create a corporate structure (e.g., corporation, limited liability company, etc.) under which to conduct their business—if only as a shield against personal liability. What people are generally not told is that this corporate shield is not a magical, one-time act, but rather an ongoing course of conduct. Ultimately, it is important for business owners and entrepreneurs to treat their corporate entities as stand-alone entities and NOT simply as an extension of their personal selves. Although courts will generally not hold a shareholder liable for actions that are legally the responsibility of the corporation (even if the corporation has only a single shareholder), they will often do so if holding only the corporation liable would be singularly unfair to a third-party plaintiff and the shareholder's actions were clearly designed to attempt to pass personal liability off to the corporation. No bright line rule exists and determinations of whether or not to pierce the corporate veil are based on case-by-case decisions. In Illinois, a two-part test is employed in order to determine whether or not to pierce a corporation’s corporate veil and hold that corporation’s shareholder(s) personally liable to third parties. Courts will determine if: (1) there is such unity of interest and ownership that the separate personalities of the corporation and its shareholder(s) no longer exist, and (2) circumstances exist such that recognizing a separate corporate existence would allow fraud, promote injustice or promote inequitable (unfair) consequences. Some of the factors that a court will look at include: inadequate capitalization, failure to issue stock, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation, nonfunctioning of the other officers/directors, absence of corporate records, commingling of funds, diversion of assets from the corporation by or to a stockholder to the detriment of creditors, failure to maintain an arms-length relationship among related entities, whether the corporation is a mere façade for the operation of the dominant stockholders, and other factors the court may find relevant. It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that just one factor is so compelling in a particular case that it will find the shareholder(s) personally liable.