Resolving an apparent conflict between Illinois’ Limited Liability Company Act (the “LLC Act”) and a body of case law governing piercing the corporate veil of corporations, the Fourth District Appellate Court recently upheld a trial court’s ruling that members of an Illinois limited liability company (an “LLC”) cannot be held personally liable for the debts of the company, unlike shareholders of a corporation, except as specifically provided by the LLC Act.
One of the advantages of running a business as either a corporation or an LLC is the liability protection that both entities afford. Normally, a shareholder of a corporation, like a member of an LLC, cannot be held personally liability for the debts of the corporation. However, Illinois courts have decided that in certain situations, the “corporate veil” can be pierced, thus allowing a corporate creditor to pursue the personal assets of a corporation’s shareholder.
Piercing the Corporate Veil
In order to pierce the corporate veil, a court must find (1) that there is such unity of interest and ownership that the separate personalities of the corporation and individual no longer exist; and (2) circumstances must exist such that the adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.
Some of the factors that a court looks to in deciding to pierce the corporate veil include (a) not ensuring that the corporation has sufficient capital to operate; (b) commingling corporate assets with a shareholder’s individual assets; and (c) not maintaining adequate corporate records or comply with corporate formalities.
In the 2017 case of Benzakry v. Patel, the Third District Appellate Court upheld a Whiteside County trial court’s decision to pierce the corporate veil and find an individual member of an LLC personally liable for the debts of the LLC, applying the above test. However, a recent case from the Fourth District Appellate Court recently found just the opposite.
In Lewis, Yockey & Brown, Inc. v. Fetzer, et al., the Fourth District upheld a McLean County trial court’s ruling that the corporate veil of an LLC cannot be pierced except as provided by the Limited Liability Company Act (the “LLC Act”).
Limited Liability Company Act
In 1998, the Illinois General Assembly amended the LLC Act to remove a provision allowed a member or manager to be held liable for the company’s debts “to the extent that a shareholder of an Illinois business corporation is liable in analogous circumstances under Illinois law,” and inserting a provision providing that a member or manager can only be personally liable for the debts of the company if (1) the company’s articles of organization contain a provision allowing a member to be held personally liable, and (2) if a member so liable has consented in writing to the adoption of the provision or to be bound by the provision. 805 ILCS 180/10-10(d) (West 2020).
In reaching its conclusion, the Fourth District explicitly took issue with the ruling in Benzakry:
“We would respectfully suggest that this holding in Benzakry is problematic because the limited liability company in that case, KAP, had no ‘corporate veil.’ *** The appellate court in Benzakry seemed to regard a limited liability company as a type of corporation or as interchangeable with a corporation. A limited liability company, however, is different from a corporation…. The very point of a limited liability company is that it will have greater ‘informality of organization and operation’ than a corporation (citations omitted).”
The Fourth District’s opinion appears sound. If the legislature intended to allow members of an LLC to be held liable for the debts of the company in situations similar to a corporation, it would not have removed that language from the LLC Act. Absent a contrary opinion from the Illinois Supreme Court, members of LLCs in Illinois can rest assured that it is highly unlikely that they could be found personally liable for the debts their LLC in light of the Fourth District’s recent ruling.
Contact an Experienced Business Law Attorney
Setting up and running your business can be complicated and highly nuanced. If you operate as a corporation, it's essential to have the guidance of an experienced attorney who can help you maintain your corporate formalities. Located in Rolling Meadows, Illinois and serving clients throughout the Northwest suburbs and Chicago area, Hess Law Firm offers skilled counsel and knowledgeable representation for a broad scope of business matters. Call (847) 367-6990 or email info@hesslawfirm.com today to schedule an appointment.