A recent decision from the Illinois Appellate Court for the First District should be a reminder to business owners, executives and advisors of the importance of following corporate formalities and the dire consequences of failing to do so. As most business owners know, the primary purpose of organizing a corporation is to insulate the business’ shareholders, directors and officers in the corporation from liability to third parties. Traditionally, it is only when shareholders, directors and officers fail to treat the corporation as a separate and distinct entity and fail to follow corporate formalities, that courts may ignore the corporate entity and “pierce the corporate veil” to hold the shareholders, directors and officers personally liable. However, in Buckley v. Abuzir, 2014 IL App (1st) 130469, the appellate court held that under certain circumstances, a court may “pierce the corporate veil” and hold someone that not a shareholder, director or officer personally liable for the acts of the corporation.

The corporation at issue in Buckley was Silver Fox Pastries, Inc. The plaintiff had obtained a judgment against Silver Fox but had been unsuccessful in its attempts to collect on that judgment. But believing that Silver Fox had held itself out as a corporation, but had not complied with its legal obligations as such, the plaintiff took an aggressive and creative approach to collect on its judgment. The plaintiff filed a suit to pierce the corporate veil to collect the judgment against the defendant, who was neither an owner nor officer of Silver Fox. The defendant’s sister held herself out as Silver Fox’s owner and his brother-in-law was Silver Fox’s President and registered corporate agent. However, the plaintiff alleged that the defendant funded Silver Fox, made all of the business decisions and exercised ownership control over the corporation. The plaintiff also alleged that Silver Fox never filed any annual reports; its officers were officers in name only; it had no directors; it did not keep corporate records; it did not hold shareholder or directors meetings; it did not hold annual board meetings; it never issued stock; it never paid dividends; and it never had adequate capitalization and was at all times insolvent.

In the decision, the appellate court analyzed case law from throughout the country regarding piercing the corporation veil. The appellate court concluded that while courts are split on whether the veil may be pierced to reach non-shareholders, the majority of jurisdictions that have addressed this issue allow the veil to be pierced against non-shareholders where that person dominated and controlled the corporation to such an extent that the person may be considered the equitable owner.

For business owners, the take away from the court’s decision in Buckley is to remember to follow the corporate formalities. The importance of observing formalities is often (improperly) overlooked in circumstances in which there are several interrelated companies. The transactions among the companies need to be properly accounted for or the distinct status of the separate corporations may be put at risk. Take time to make sure that your corporate minute book is up to date, stock has been formally issued, the appropriate corporate meetings are held and documented, officers and directors are active in the management of the corporation, contractual relationships between interrelated companies are appropriately documented, the corporation is adequately funded and personal funds are not comingled with corporate funds, among other things.