Piercing The Corporate Veil: What Does It Mean?
Introduction:
An essential and valuable aspect of limited liability entities is that the owners of the entity are not usually liable for the debts and obligations of the entity. It was the invention of the concept of limited liability two hundred years ago that enabled the massive investment in business that helped fuel modern economies. People could invest their money and, while they risk the money invested, they are not risking all their assets if the company fails.
Corporations, Limited Liability Companies and Limited Partnerships can provide owners with limited liability. Generally, the owners are not answerable for the debts of the entity.
Corporations are the most common form of limited liability companies, and they are divided into public corporations, in which ownership is available on public stock exchanges, and private corporations whose shares are not publicly available. While the protection of limited liability is strong, the protection for owners of a corporation from liability is not absolute. There are times when the shareholders have committed acts that make them accountable for the corporation’s debts.
To impose personal liability on the owners, a plaintiff must pierce the so-called “corporate veil.” In Illinois, this is done under what is called the Alter Ego Doctrine. The Doctrine is used to make a corporation’s owner (its shareholders) liable when the shareholder improperly uses the corporate entity to commit acts which improperly harm the corporation, or third persons dealing with the corporation.
The Basic Law:
The Doctrine is intended to prevent individuals or other corporations from misusing the corporate laws by forming a corporate entity for the purpose of committing fraud or other misdeeds. Under the Doctrine, when the corporate form is used to perpetuate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts may disregard the corporate entity and hold its individual shareholders liable for the actions of the corporation. The separate personality of the corporation is a statutory privilege, and it must be used for a legitimate business purpose and must not be perverted. When it is abused, it will be disregarded and the corporation looked at as a collection of individuals.
Piercing the corporate veil is seldom easy. However, we have found that if there is clear unfairness if the protection is given, many judges are inclined to take such corrective action. It is not merely that a creditor is not paid a debt…it must be that the reason the creditor is not paid is that the shareholders took some action that strikes that court as improper and contrary to usual business practices.