December 18, 2017
By: John J. Pembroke

Maintaining your limited liability umbrella, i.e. the “corporate veil”.

Once you have formed your limited liability entity, it is also important to administer your day-to-day operations in order to maintain your limited liability umbrella, sometimes called the “corporate veil”. If you don’t do certain minimum things, your creditors can more easily “pierce the corporate veil” and reach your personal assets for debts of your company.

If you conduct business as a corporation, limited liability company (LLC) or limited liability partnership, you are paying for a structure to, among other things, protect your home, life savings and other personal assets from liability from a business debt. These can include suits from a business customer, employee, vendor, accident victim or other person that may result in a judgment against your business that is greater than your company’s insurance coverage and net worth. The judgment creditor then wants to go against the business owner’s personal assets, which is sometimes referred to as “piercing the corporate veil”.

If you use your company name without indicated its limited liability status, i.e NOT saying, Inc., LLC, P.C. or similar ending after your company name, as required by Illinois business statutes, this practice gives people you do business with the impression you do not have limited liability. Forgetting or omitting your full legal name on all letterhead, business cards, invoices, checks, and similar documents used in your business, or on your business vehicles or places of business, does not protect you personally, or your personal assets, or the assets of your fellow shareholders/members/partners, from creditors. If the company were sued, a smart litigator will also name each partner/shareholder/member personally, either at the initial pleading stage or later if there is a judgement, when he or she comes to collect. The easiest, low-hanging fruit to attack in such a case is your house, and those of your other business owners.

It’s ok to have the stylized name as a trademark or service mark, but without the “Inc.”, you appear to be a general partnership or an unincorporated business with unlimited liability. The better answer is that if you do use a trademark or service mark, you use “Inc.” somewhere, even in the tiny type at the bottom of your letterhead or other business document. And, it’s worth doing immediately, even if you have to throw out some letterhead and business cards. The notion is that the law requires you to put your employees, vendors, the general public, and others who may deal with the company on notice that it is a limited liability entity. Giving such notice therefore does not work a disservice to some unsuspecting plaintiff who may be relying on the availability of unlimited liability in dealing with your company.

To continue protecting your limited liability or “corporate veil”, you should maintain your registration in good standing with the Secretary of State of incorporation, and of each state in which you have a material presence that is doing business, sometimes called nexus. Without good standing, state law generally denies your company access to its court system for preserving or defending your organization’s rights in that jurisdiction.

Also, apart from what you are telling your customers, the general public, and the governmental bodies, it is important to maintain the corporate formalities and the appearance of organization by having meetings of your shareholders/members/partners at least annually, and, if applicable, your board of directors, keeping your corporate records and books of account up to date, and generally keeping your business and tax records up to date and preserved for at least seven years (for income tax purposes). One common early discovery request when a lawsuit is filed is for the organization to produce to the plaintiff or government such records. The lack of maintaining such records can lead to unintended consequences, including an attempt by parties adverse to your organization to “pierce the corporate veil” or treat your business as being managed in such a haphazard way that it is not entitled to be treated as a separate legal entity with limited liability. In most jurisdictions, no bright-line rule exists and the determination is generally based on common law precedents and/or the “totality of the circumstances”. So, this underscores the importance of administering the day-to-day and operational affairs of your organization in a prescribed, business-like manner to support the theory and availability of limited liability