Business Law
Personal Liability for Failing to Maintain Statutory
Corporate Formalities:
A Trap For The Unwary Corporate Shareholder
Did you ever imagine that you would find yourself paying personally for the obligations of your corporation? Of course not. Your lawyer probably told you that corporations under Illinois law provide a statutory shield to personal liability for the corporation=s owners. But you may not have remembered that your attorney also told you that maintaining corporate formalities is important and that the failure to maintain those formalities may lead to personal liability, in spite of your corporate Ashell.@
Recently, one corporate owner found himself in just this position. Hoskins Chevrolet, Inc. sells automobiles and automobile parts. Hoskins was contacted by Ronald Hochberg, who ordered parts and who said his business was called Diamond Auto Construction. In fact, there was no such corporation with that name B Hochberg actually owned a company having a different name.
When he did not pay, Ronald Hochberg, individually and doing business as Diamond Auto Construction, was sued by Hoskins Chevrolet to collect amounts owed for automobile parts valued at over $40,000.00, and which were never paid by Diamond Auto.
When Diamond Auto received the lawsuit, it filed its answer indicating that in fact it had received the automobile parts which were the subject of the lawsuit, but that it had done so only in Hochberg=s capacity as president of Diamond Auto Body and Repair. Diamond argued that Ronald Hochberg, the owner, was not individually liable for the amounts owed to Hoskins Chevrolet, but because of the Acorporate shield@ of the Illinois corporation, Hoskins Chevrolet could not pursue its claims against him, and had only the opportunity to pursue its collection action against Diamond. Hochberg and Diamond=s argument was rejected.
Hoskins Chevrolet filed a Motion for Summary Judgment, which asks the Court to decide the case on its merits without the necessity for a trial. Hoskins= Chevrolet argued that at all times when it had done business with Ronald Hochberg and Diamond Auto Construction, it had done business with Hochberg, individually. Furthermore, they argued that Diamond Auto was not really a corporation, nor had it ever been registered with the Secretary of State as the assumed name of a corporation, which is required under the law in Illinois. The corporation can use a name other than its own registered corporate name under the Illinois Business Corporation Act, but it must register that name as a Aassumed name@ or Ad/b/a@ with the Secretary of State in compliance with the procedures set up by the legislature.
Ronald Hochberg argued that Illinois law did not impose liability upon him simply because the corporation used an unauthorized name. The Court, after considering the Motion for Summary Judgment and the arguments of the parties, awarded Hoskins Chevrolet most of what is was seeking in the lawsuit, and imposed that judgment against both Ronald Hochberg, individually, and his company.
Hochberg appealed. In considering this case, the Illinois Appellate Court reviewed the Illinois Business Corporation Act and stated that the Act requires a corporation to conduct business under its own corporate name, unless that corporation has followed the procedures to adopt an assumed name. Those procedures are found at 805 ILCS 5/4.15.
The Act also states that a corporation may use the name of a division, even though it is not separately incorporated, so long as the corporation discloses its corporate name. See the Act at Section 4.15(b)(2).
Considering these Sections and the long established principles that corporations and their officers, directors and shareholders must follow corporate formalities to maintain the corporate Ashell@, the Appellate Court upheld the decision against Ronald Hochberg, individually.
Here, since Hochberg never registered the assumed name, nor disclosed the corporate name as provided by the law, he was responsible individually for the debts that he incurred. It did not matter that he intended those debts to be the obligations of his company. The law is clear and corporations and their officers and agents in Illinois are required to know the law and follow the letter of the law. In a side comment, the Appellate Court noted that there was no good faith effort on the part of Hochberg or his company to comply with the Act=s formalities. Had he done so, he might have rendered himself a Ade facto@ corporation. There is case law to suggest that such a de facto corporation might protect an unwary owner. Duvane, Inc. v. Mongreig, 193 Ill.App.3d 636(1990).
The warning echoed by the Appellate Court in this case has been repeated time and time again by lawyers to their Illinois business clients. In so many ways, corporate officers and shareholders and directors can abuse the corporate form and expose themselves to liability for failing to follow corporate formalities. Corporations that do not maintain corporate minute books, hold corporate meetings, file corporate documents required by law, enter into contracts in the names of owners, rather than the corporate entities, etc., expose themselves to the potential risk of being held liable, individually, for the obligations they actually intended as part of their corporate activity.
Do not wait to review your corporation=s actions. Consider now contacting your counsel to ensure proper observance of corporate structure, corporate formalities and legalities.
We will be happy to conduct an audit and review your procedures, or answer other questions that you may have from time to time. Please call Marc Sherman or Scott Sherman at 847/674-8756 or write to us at info@mshermanlawoffice.com