August 29, 2006

Doing business as a corporation provides you with a number of significant benefits, not the least of which is to insulate you from unlimited liability for corporate activities. As a general rule, you are not liable for your corporation's debts. An exception exists, however, when a corporation is deemed to be merely the alter ego or business conduit of another entity or individual. Under these circumstances, a court may be able to disregard the corporation and "pierce the corporate veil," thus imposing liability on that other entity or individual.

One of the questions a court will consider before it pierces the corporate veil is whether there is "unity of interest and ownership" such that the separate personalities of the corporation and the individual are indistinguishable. Typically, "unity of interest and ownership" will be shown when the individual or the other entity owns stock in the corporation. Does this mean that directors and officers who do not own stock are immune to liability? Not necessarily, according to the Illinois Appellate Court. In a recent opinion, the appellate court affirmed a trial court decision to impose personal liability on the president of a corporation, even though he owned none of the company's stock.

In Fontana v. TLD Builders, the appellate court affirmed a $1.2 million judgment against Nicola DiCosola, the president of TLD Builders Inc. The lawsuit arose when TLD—an Illinois construction company contracted by the Fontana family to build a million-dollar home—allegedly failed to complete the project under the September 24, 1999 construction contract and abandoned all work on the home in February 2001. Even though Nicola's wife, Theresa, owned 100% of the company's stock, the Fontanas sued Nicola and TLD, seeking to pierce the corporate veil and hold Nicola personally liable. After a bench trial, the court entered judgment in favor of the Fontanas and against both the corporation and the individual.

Based on testimony by Nicola and his wife regarding their roles in TLD, the trial court cited the following factors in favor of piercing the corporate veil:

  • TLD was inadequately capitalized; the court did not believe that Theresa actually wrote a $1,000 check as initial capitalization for 1,000 shares of stock.
  • The company failed to observe certain corporate formalities, such as corporate resolutions authorizing notes to be paid to the DiCosolas to satisfy the loans they made to TLD
  • The corporation failed to pay dividends to Theresa (the sole stockholder).
  • TLD operated without a profit.
  • TLD had no employees, nor did it pay any salaries, which resulted in the commingling of corporate and personal assets.
  • Theresa was a non-functioning officer or director because she had no real decision-making role.
  • TLD was insolvent.
  • There were no corporate records, such as corporate resolutions regarding loans made to TLD.

The trial court asserted that only one factor weighed against piercing the corporate veil: the actual issuance of stock to Theresa. Consequently, it found that Nicola himself was the "dominant force" behind TLD and that the corporation was "little more than a shell which was established to shield him from liability." The court further determined that allowing the corporate form to shield Nicola from liability would, under these circumstances, "be an obstacle to the protection of private rights." The appellate court agreed.

Fontana v. TLD Builders is an important reminder that the best way to reap the benefits of doing business as a corporation is to follow the formalities required under Illinois law. Otherwise, you may forfeit the protections that the corporate structure generally affords. We recommend consulting with your attorney periodically to review these requirements.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.