For decades, attorneys, CPAs, and multiple websites have encouraged business owners to organize their business as a limited liability company (LLC), primarily to protect themselves from personal liability. That is still a good plan. However, both existing and new business owners need to be aware that the latest amendment to the Illinois Limited Liability Act (effective January 1, 2025) significantly expands the circumstances under which a member or manager of an LLC could be held to be personally liable for the debts and obligations of their company. In fact, the new law expressly provides that under the right circumstances, a Court can “pierce the veil” that otherwise is designed to protect against such individual liability.
Traditionally, the law immunizes corporate officers from corporate liabilities and debts, but corporate officer status does not insulate a person from liability for the torts of the corporation in which he actively participates. People ex rel. Madigan v. Tang, 346 Ill. App. 3d 277 (2004). It was long thought that the same principles would apply to members and mangers of LLCs.
However, two cases from the Illinois Appellate Court significantly restricted the liability of individual members and managers of LLCs, beyond what had been set forth in corporate law. First, in 2006 in Puleo v. Topel, 368 Ill. App. 3d 63, 70 (2006), the Appellate Court held that the managing member of a dissolved LLC could not be held personally liable for the dissolved company’s unpaid debts and obligations. The court rejected the argument that a dissolved LLC should be treated the same as a dissolved corporation. At the time, the Illinois Business Corporation Act imposed liability to third parties on the officers or shareholders of a dissolved corporation where they exceeded their authority. By contrast, the Limited Liability Company Act provided that liability for members or managers of an LLC was owed only to the Company. Notably, Puelo did not consider or decide whether the long-standing doctrine of piecing a corporate veil would apply to LLC members.
Subsequent Illinois cases, however, found that under Delaware law, which is persuasive authority in Illinois, the doctrine of piercing the corporate veil could apply to a limited liability company. Westmeyer v. Flynn, 382 Ill. App. 3d 952, 960 (2008).
Yet in 2013 in Dass v. Yale, 2013 IL App (1st) 122520, the court ruled that a manager of a limited liability company that sold a condominium unit to purchasers was not personally liable to purchasers for alleged frauds perpetrated by the LLC during the sale of the unit. The complaint alleged that the manager had participated in the fraud and then covered it up. However, the court rejected that claim, because the LLC’s articles of organization did not contain a provision for manager liability, the manager never consented in writing to such a provision, and the express language of the statute governing LLC liability had been changed to prevent manager liability. Similarly, in Carollo v. Irwin, 2011 IL App (1st) 102765, the court ruled that a member of even an unformed LLC could not be individually liable for signing the property sales contract on behalf of the unformed LLC, because Section 10-10 (a) of the Act provided that “[a] member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.” 805 ILCS 180/10–10(a) (West 2006).
The newly-enacted amendment expressly overrules the decisions in those cases. The pertinent section now states as follows:
(a-5) Nothing in subsection (a) or subsection (d) limits the personal liability of a member or manager imposed under law other than this Act, including, but not limited to, the law of agency, contracts, and torts, and, subject to subsection (c), court-imposed equitable remedies, such as piercing the limited liability company veil. The purpose of this subsection (a-5) is to supersede the interpretation of subsections (a) and (d) set forth in Dass v. Yale, 2013 IL App (1st) 122520, and Carollo v. Irwin, 2011 IL App (1st) 102765, and clarify that under existing law a member or manager of a limited liability company may be liable under law other than this Act for his, her, or its own wrongful acts or omissions, even when acting or purporting to act on behalf of a limited liability company.
Thus, the amendment clarifies that, as with corporations, someone who personally engages in in a wrong can still be personally liable for that wrong, and is not insulated from liability under the LLC Act. Interestingly, new subsection (a-5) includes contract law as the fields in which a member or a manager can be liable. Under corporate law, corporate officers are generally not liable for a corporation’s breach of contract because the officer has a duty to the corporation that is higher than that to third parties. HPI Health Care Services, Inc. v. Mt. Vernon Hosp., Inc., 131 Ill. 2d 145 (1989). Because the amendment applies to “other law,” that would seem to apply the principles set forth in HPI Health Care to LLC members as well.
Finally, the amendment makes clear that the veil of a limited liability company can be pierced and personal liability for the managers and members imposed, just as it can with a corporation. Whether or not a court can “pierce the veil” depends on a number of factors that the courts have used over the years to impose personal liability on the shareholders or officers of a corporation. Those can include “(1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm’s-length relationships among related entities; and (11) whether, in fact, the corporation is a mere façade for the operation of the dominant stockholders.” Angell v. Santefort Fam. Holdings LLC, 2020 IL App (3d) 180724, ¶ 24.
Accordingly, LLC owners and managers should take a careful look at the actual organization of their LLC and take steps to ensure that any of the above factors do not apply to their company. Consulting an attorney and CPA to be sure that everything is in order is a good way to start.
By Peter M. Storm
Storm & Piscopo, P.C.
At Storm & Piscopo, P.C., we handle a wide range of business law and commercial law challenges for clients throughout Illinois.