The Journal of The DuPage County Bar Association

Back Issues > Vol. 24 (2011-12)

The Iron-Clad “Corporate Veil” of a Limited Liability Company Doesn’t Come Without Its Price
By Paul D. Nordini

One motivation to creating a business entity, and some would argue the primary reason, is to limit the liability of the owners and or investors. With corporations, the shield against liability (the “corporate veil”) is not absolute and is not without its exceptions. Caselaw on piercing the corporate veil is not hard to come by as it pertains to corporations.[1] However finding precedence as it relates to asserting liability upon a member of a Limited Liability Company (LLC) is more elusive, at least when a third-party knows of the LLC’s existence. In fact, the purpose of this article is to: 1) highlight the “corporate veil” of an LLC and its near iron-clad properties; and 2) identify that this special treatment comes at a price: that agents, members, or managers must always fully disclose the name of their principal to third-parties, and the status of registration.     

Better Protection Than That of A Corporation. Different from corporations, an LLC only exists by way of statute. Further, the statute that allows for the existence of an LLC also better shields its members (arguably better than corporate shareholders).[2]

Consider first the failure of registering a corporation versus the failing to register an LLC. In Illinois, failing to register a corporation may result in a piercing of the corporate veil.[3] However, the failure to register a limited liability company will not attach liability to its members (members being the equivalent of shareholders to corporations).[4]

In the recent case of Carollo v. Irwin, a third party buyer was an “unformed” limited liability company.[5] When examining the rights and liabilities of the not yet registered LLC, the First District Illinois Appellate Court noted that because the entity was never truly formed, it could not statutorily comply with the terms of an agreement that required it to take property and incur liabilities.[6] Additionally, the Carollo court reasoned that under the Illinois Limited Liability Company Act, the LLC could not be bound by an agreement for which its member had had no authority to bind the entity.[7]

More importantly, however, is that court’s focus on notice and its importance. Because the parties in Carollo knew the LLC was “yet to be formed” as indicated upon the contract, that fact was enough for the court to draw distinction and embrace the agent within the protective statutory veil (though, the LLC was not yet formed).[8] The court’s examination of the “agent” in Carollo is as interesting as the conclusion that the underlying entity also avoids liability as a result of the real estate contract.[9]

What appears to be the fulcrum of liability in Carollo, or the lack thereof, is whether or not the limited liability company was disclosed and thereby triggered statutory protections. In essence, the court’s decision was premised on notice.[10] Other considerations that the court mentioned were largely revolving around interpretation of the Illinois Limited Liability Company Act (as amended in 1997) and its distinction as compared to the Illinois Business Corporations Act of 1983.[11] The Carollo court further identified many of the other statutory shields afforded to members (and managers) of an LLC.[12] In the end, the “unformed” Limited Liability Company and its member completely avoid liability on a contract.

The Price of the Iron Clad Shield. A Limited Liability Company is a creature of contract and statute.[13] Under the Uniform Limited Liability Company Act, the name of a limited liability entity must contain “limited liability company” or “limited company” or the abbreviation “L.L.C.,” “LLC,” “L.C.,” or LC.”[14] Differently, corporations are permitted more leniencies in the non-disclosure of their names. Like many other states, Illinois allows corporations to use “division” names as unregistered “assumed names” when transacting business.[15] In fact, a corporation operating under “an assumed name without registering the name under the Assumed Name Act [can also] sue and be sued.”[16]

 As a member or manager of an LLC, if you want the “iron clad” liability protection of an LLC (as mentioned in Carollo), you must remember that the protections do not come without its price. Illinois statute provides that an LLC must disclose its true and proper “LLC” name (including the indicium). In addition, when using an assumed name, a LLC must provide notice of its actual LLC name .[17] Further, a limited liability company seeking to use an assumed name must comply with the Illinois statute for registration of assumed LLC names in order to transact business within the state.[18]

In addition to the requirements as set forth in statute, members and managers of an LLC should always identify the LLC on documents and contracts. Identification isn’t limited to the name, but more so, the third party must know it’s a limited liability company, and not that of a corporation, partnership, or sole proprietor.

Whether or not the signer of a contract executed on behalf of a limited liability company (as its agent) is generally an issue of fact. However, it may be determined as a matter of law if the parties identified on the contract are without dispute.[19] If a member or manager of an LLC fails to identify the principal, not only do the member and or manager lose the Carollo defense to thwart personal liability, but also parol evidence is not admissible to rebut the presumption of the agent's personal liability.[20] Disclosing the principal LLC on the contract is not only proper notice, but imperative to receive protections from personal liability.

Partially disclosing a limited liability company’s name isn’t enough.[21] Only full disclosure of the limited liability company, to include its name with indicium, satisfies disclosure of a principal.[22] Abbreviations of an entity are inadequate because they may still infer that the contracting party is a sole proprietorship or partnership.[23]An agent who contracts with a third-party on behalf of an undisclosed or partially disclosed principal is liable personally on the contract.[24]

The reason for the rule is reliance. A third party is relying on the credit of the agent and not that of the principal when the agent is contracting on behalf of an undisclosed principal.[25] Agents are not unfairly burdened by this rule because “(i)f the agent would avoid personal liability, the duty is on him to disclose his principal; it is not upon the party with whom the agent deals to discover the principal. There is no hardship in this rule of liability against agents who do not disclose their principal; they always have it in their power to relieve themselves from such liability, and when they do not, it must be presumed that they intend to be liable”[26]

Additionally, one shouldn’t rely on statutory and or constructive notice. For example, in Colorado, the court has found that their notice provision in its statute governing limited liability companies, under which the filing of articles of organization is notice that the company is a limited liability company, does not create a conclusive presumption that a third party has constructive notice of the existence of the limited liability company.[27] The Colorado court also warned that notice should never presumed or inferred.[28]

Without properly identifying the limited liability company, in whole with its indicium, mutuality only exists between the third-party and the agent of the limited liability company. The entity becomes non-existent as it relates to a contract without full disclosure of the principal. Without disclosure of the limited liability company, the person who affixes his or her signature to an instrument is the party that may sue for performance or be sued.[29]

Conclusion. When representing persons interested in forming a limited liability company, (or for those already operating an LLC), all the general rules apply. However, taking the recent Carollo decision into consideration, certain disclosures should always be required when doing business to ensure limited liability protections: members and or managers should identify on all instruments the full name of the limited liability company, its indicium, and also note the status of registration. Only full compliance with these disclosures enables an LLC to assert statutory protections under the Illinois Limited Liability Company Act. Without such disclosures, an agent, member or manager, hasn’t paid the price for the protections afforded by the Illinois Limited Liability Company Act.  

[1]Richard M. Horwood, LLCs: The Double-Edged Sword in the Asset Protection Battle, 4 J. Of Limited Liability Companies 83 (1997);Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L.Rev. 1036 (1991).
[2]Trover v. 419 OCR, Inc., 397 Ill.App.3d 403, 921 N.E.2d 1249, 337 Ill.Dec.111 (5th Dist. 2010).See also, Hoskins Chevrolet, Inc. v. Hochberg, 294 Ill.App.3d 550, 691 N.E.2d 28, 229 Ill.Dec.92 (1st Dist. 1998).
[3]People v. Arnold, 3 Ill.App.3d 678, 279 N.E.2d 436 (1st Dist. 1972)
[4]Carollo v. Irwin, 2011 IL App (1st) 102765, 2011 WL 4444472 (1st Dist. 2011).
[5]Id. at ¶ 1.
[6]Id. at ¶ 32.
[7]Id. at ¶ 43.
[8]Id. at ¶ 46.
[9]Id. at ¶ 52.
[10]Id. at ¶ 63; ( the court also citing, Estate of Plepel, 115 Ill.App.3d at 807-08, 71 Ill.Dec. 365, 450 N.E.2d 1244 (holding liability on a decedent’s estate because claimants did not know they were dealing with a corporation)).
[11]Id. at ¶ 54-55; See also, Puleo v. Topel, 368 Ill.App.3d 63, 69-70, 306 Ill.Dec. 57, 856 N.E.2d 1152 (2006).
[12]Id. at ¶ 56-57.
[13]Spurlock v. Begley, 308 S.W. 3d 657 (Ky. 2010); Pitman Place Development, LLC v. Howard Investments, LLC, 330 S.W.3d 519 (Mo. Ct. App. E.D. 2010); See also CML V, LLC v. Bax, 6 A.3d 238 (Del. Ch. 2010).
[14]Revised Uniform Limited Liability Act.
[15]Main Street Development v. DeMicco, 248 Ill.App.3d 392, 618 N.E.2d 442, 187 Ill.Dec. 851 (1st Dist. 1993).
[16]Thompson v. Cadillac, 187 Ill.App.3d 104, 543 N.E.2d 308, 135 Ill.Dec. 73 (2nd Dist. 1989).
[17] 805 ILCS 180/1-10 (a)(5) (an LLC “shall be the name under which the limited liability company transacts business in this State unless the limited liability company also elects to adopt an assumed name or names as provided in this Act; provided, however, that the limited liability company may use any divisional designation or trade name without complying with the requirements of this Act, provided the limited liability company also clearly discloses its name; . . ..”) (emphasis added).
[18] 805 ILCS 180/1-20(b). (Statute noting that “Before transacting any business in Illinois under an assumed limited liability company name or names, the limited liability company shall, for each assumed name, execute and file in duplicate an application setting forth all of the following:(1) The true limited liability company name.(2) The state or country under the laws of which it is organized.(3) That it intends to transact business under an assumed limited liability company name.(4) The assumed name that it proposes to use.”).
[19]Ioerger v. Halverson Construction Co.,232 Ill.2d 196, 202, 327 Ill.Dec. 524, 902 N.E.2d 645 (2008); Churkey v. Rustia, 329 Ill.App.3d 239, 243, 263 Ill.Dec.761, 768 N.E.2d 842 (2002).
[20]Bank of Pawnee v. Joslin,166 Ill.App.3d 927, 935, 118 Ill.Dec. 484, 521 N.E.2d 1177 (1988).
[21]Jameson Rality Group v. Kostiner, 351 Ill.App.3d, 416, 813 N.E.2d 1124, 286 Ill.Dec. 431 (1st Dist. 2004).
[22]Gillet v. New Market Savings Bank, 7 Ill.App. 499, 1880 WL 10442 (1880).
[23]Water, Waste & Land, Inc v. Lanham, 955 P. 2d 997 (Colo. 1998).
[24]Kimco Corp. v. Murdoch, Coll&Lillibridge, Inc. 313 Ill. App. 3d 768, 772, 246 Ill. Dec. 678, 730 N.E. 2d 1143 (2000), citing Mawer-Gulden-Annis, Inc. v. Brazillian & Colombian Coffee Co., 49 Ill. App. 2d 400, 404, 199 N.E. 2d 222 (1964); see also Gillet v. New Market Savings Bank, 7 Ill. App. 499, 1880 WL 10442 (1880).
[26]3 Am, Jr. 2d Agency Section 325 (1986); see also Jameson Realty Group v. Kostiner, 351 Ill. App. 3d 416, 813 N.E. 2d 1124 (1 Dist. 2004).
[27]Water, Waste & Land, Inc v. Lanham, 955 P. 2d 997 (Colo. 1998).
[29]In re Bedrock Marketing, LLC, 404 B.R. 929, 79 Fed. R. Evid. Serv. 597, 68 U.C.C. Rep. Serv. 2d 694 (Bankr. D. Utah 2009), Kimco Corp. v. Murdoch, Coll & Lillibridge, Inc. 313 Ill. App. 3d 768, 772, 246 Ill. Dec. 678, 730 N.E. 2d 1143 (2000), Mawer-Gulden-Annis, Inc. v. Brazillian & Colombian Coffee Co., 49 Ill. App. 2d 400, 404, 199 N.E. 2d 222 (1964), Gillet v. New Market Savings Bank, 7 Ill. App. 499, 1880 WL 10442 (1880).

Paul D. Nordini has offices in Naperville, IL.  He proudly served in the Marine Corps - Special Operations Battalion in Operation Desert Shield and Storm prior to attending DePaul University College of Law.  He practices primarily in divorce and custody litigation.
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