The existence of the entity shields these individuals from the debts, obligations and liabilities of the entity. Piercing the veil effectively sets aside this protection allowing the owners or members of an entity to be held personally liable for the obligations and liabilities of the entity. The two-pronged test for the corporate veil piercing is well established at common law and requires that: 1 that there must be such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exists and 2 circumstances must exist such that adherence to the corporate existence would sanction a fraud, promote injustice, or promote inequitable consequence. Unlike a corporation, the theory of piercing the veil of an LLC is not fully decided in Illinois.
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There, the plaintiffs sought to pierce the veil of an investment company formed as a limited liability company by two individual members. The plaintiffs, two construction companies, entered into contractual agreements with the LLC to provide construction management and carpentry services for the development of a retail complex. The LLC withheld payment from the plaintiffs because the company members disputed whether the plaintiffs fulfilled all of their obligations under the terms of the contract. With the exception of the plaintiffs, all other subcontractors associated with the construction project received payment from the LLC. The plaintiffs filed a claim for breach of contract against the LLC, and although the trial court held in favor of the plaintiffs, the LLC was dissolved during the pendency of litigation and the trial court refused to pierce the corporate veil of the LLC so the plaintiffs could recover damages against the individual members. Prior to this case, no Illinois court had held that the doctrine of piercing the corporate veil applied to an Illinois limited liability company. Here, the court accepted the applicability of the doctrine to LLCs, but refused to pierce the veil. To determine whether to pierce the corporate veil of the LLC, the court employed a two-prong test:.
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Piercing the Limited Liability Company Veil
What jurisdiction's law applies? Generally, the law of the state of incorporation or formation applies, based on the "internal affairs doctrine. Transport International Pool, Inc. Multi-Media Holdings, Inc. In some cases, Federal common law may apply. Under Illinois law, two requirements must be met Gallagher v. Reconco Builders, Inc. Unity of interest and ownership such that the separate personalities of the corporation and the individual no longer exist. Adherence to the fiction of separate corporate existence would sanction a fraud or injustice. Factors in applying the two-part test.
However, this insulation from liability is not absolute. As a result, PCV poses a significant threat to parent organizations, corporate shareholders, or, as recently held in Buckley v. Abuzir , any individual, regardless of title or position, who in reality dominates the corporation.