Greta Jones contracts with Malovan, Inc. to provide equipment and services. Malovan is owned by Mark McDonald, its sole shareholder. Jones fully performs her obligations and submits an invoice to Malovan. After numerous unsuccessful attempts to collect, Jones sues both Malovan and McDonald. Can Jones obtain a judgment against McDonald? Under prevailing Illinois law, McDonald is shielded from liability for debts of his corporation. A corporation is a legal entity separate and distinct from its shareholder, directors and officers. One of the benefits of forming a legal entity such as a corporation is to protect the owners, directors and officers of the corporation from having their individual assets exposed to a party who has a claim against the corporation. But exceptions exist.
Under the doctrine, piercing the corporate veil, a person may hold others liable for debts and liabilities of a corporation. The issue becomes significant, for example, when the claimant is unable to collect on a judgment against the corporation, because the corporation has insufficient assets to satisfy the judgment.
Illinois courts have addressed various circumstances and decided when the corporate veil may be pierced. A corporation may be organized and controlled by another such that maintaining the fiction of separate identities would result in a fraud or promote injustice. Courts have imposed liability on owners, separate from the corporation, when the court finds a unity of interest and ownership so that the separate identities no longer exist; and that preserving the separateness of the corporation would promote injustice.
In finding a unity of interest and ownership, courts have considered the following factors: (1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the corporation; (6) directors and officers are nominal and nonfunctioning; (7) absence of corporate records; (8) commingling of corporate and personal funds; (9) diversion of corporate assets to an owner or other person to the detriment of creditors; (10) failure to maintain an arms-length relationship among related entities and persons; (11) whether the corporation is a mere façade for the operation of dominant owners.
It is rare that a corporate veil will be pierced; the separate identities of the corporation and its owners, directors and officers is normally upheld, such that the individuals may not be held liable for the corporation’s debts and liabilities. In a recent decision, however, the Illinois Appellate Court affirmed the lower court’s decision to allow a claimant (itself a corporation) to pursue collection from the owner and companion company where the claimant was unable to collect from the corporation itself. Steiner Electric Co. v. Maniscalco and Sackett Systems, Inc., 2016 IL App (1st) 132023. A subsequent blog entry will describe the decision in Steiner.