Avoid Being Personally Liable

This post was written by Justine Bugaoisan, a Springboard Graduate Assistant and is based on information provided by Brie A. Crawford, Esquire, a Patent Attorney registered to practice before the United States Patent and Trademark Office. 

This post is for informational purposes only and not for the intention of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.

Business owners could do themselves a big favor by taking minimal steps.[1]

The main objective of an LLC, corporation etc. is to protect the business’ owner’s personal assets in the event a lawsuit is filed against the business.  It is a strong trend among business owners that after filing paperwork for this business entity formation, nothing further needs to be done to avoid personal liability.[2] It is important to follow through with an attorney to prepare Operating Agreements, Shareholder’s Agreements, etc.  In Illinois and many states, these “corporate formalities” are necessary to protect the owner’s personal assets in litigation.  A business owner will need to “prove” to the courts and a plaintiff that the plaintiff cannot “pierce the corporate veil” and obtain personal assets that were separate from the business.

Corporate formalities, which prove the rituals of the business are a bona fide corporation[3], include annual shareholder and board director meetings, even if it is just written communication.  Meetings should be held more often and documented by a corporate secretary with meeting minutes that reflect what was discussed.[4]  The substance of a corporate meeting may not be as significant as the actual meeting itself.[5] Meetings act like a city council board where policies and decisions are discussed, voted on, and approved.  In addition, a corporate record book should be kept that includes corporate actions, capital structure issues, and other relevant corporation matters.  This may be tedious and counterproductive in the middle of trying to keep a business running. However, these steps can pay back in dividends, as courts will contemplate whether there were corporate meetings or corporate formalities in determining whether an owner is personally liable.

Consider Gallagher v. Renconco Builders, Inc. 91 Ill. App. 3d 999, 1006 (1st Dist. 1980) where the owners did not observe corporate formalities, corporate resolutions, meetings, or able to produce any corporate books. The court held the shareholder personally liable for fraud and awarded the plaintiff all damages, repairs, and liquidated damages.

Consult a lawyer or ensure you have the documentation necessary to keep your records updated in order to avoid a big loss.  This may be burdensome to keep up with but the cost can be relatively low and save many headaches and money in litigation in the future.

[1] The information is for informational purposes only and not for the intention of providing legal advice.  You should contact your attorney to obtain advice with respect to any particular issue or problem.

[2] Based on information by Brie A. Crawford, Esquire. Patent Attorney registered to Practice Before the United States Patent and Trademark Office.

[3] 7 Charles Murdock, Illinois Practice Series, Business Organizations § 8:17 (2d ed. 2014).

[4] Reda, Ciprian, Magnone LLC.  Illinois Incorporations. 2011.  Web. 25 Aug. 2014 <http://www.illinois-attorney.com/practice-areas/illinois-corporate-and-business-transactional-law/illinois-incorporations/&gt;

[5] 7 Charles Murdock, Illinois Practice Series, Business Organizations § 8:17 (2d ed. 2014).

 

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