When Can Business Owners Can Be Held Personally Liable?
As business litigation attorneys serving clients throughout the greater Chicago area, one of the most important discussions we have with business owners is about personal liability. Many business owners believe that forming a corporation or limited liability company (LLC) automatically protects them from any personal responsibility for business debts or lawsuits. While that’s often true, it is not absolute. There are specific circumstances under Illinois law where personal liability can still attach, and failing to understand those can put your personal assets at risk.
At The Business Law Group, we work with businesses of all sizes to help them understand where the lines are drawn and how to stay on the right side of the law. As “The Chicago Business Lawyers®,” we’re here to explain when and how personal liability can arise and what business owners can do to protect themselves.
Understanding Limited Liability Protection Under Illinois Law
In Illinois, most business entities are created under the Illinois Business Corporation Act or the Limited Liability Company Act. These statutes, including 805 ILCS 5/1 et seq. for corporations, allow for the formation of legal entities that are separate from their owners. The main benefit of this structure is “limited liability,” which means that shareholders, members, and officers are not personally responsible for the debts and liabilities of the company.
However, this limited liability protection can be lost under certain conditions. Courts can, and do, disregard the corporate structure when owners fail to treat the company as a separate entity or engage in wrongful or fraudulent conduct.
Piercing The Corporate Veil In Illinois
The most common way that business owners become personally liable is through a legal doctrine called “piercing the corporate veil.” Under this theory, a court may hold owners personally responsible if they treat the corporation or LLC as an extension of themselves instead of a separate entity. Illinois courts look at multiple factors when determining whether to pierce the veil, including, but not limited to:
- Commingling of personal and business funds
- Failure to maintain corporate records or observe corporate formalities
- Undercapitalization of the business
- Using the corporation to promote fraud or injustice
Illinois courts have made it clear that veil piercing is an equitable remedy used to prevent injustice or unfairness. The goal is not to punish but to ensure that liability does not go unaddressed when the company structure is abused.
Personal Guarantees And Contractual Liability
Business owners often become personally liable not because of legal wrongdoing but because they voluntarily accept that risk. One example is signing a personal guarantee. Many banks, landlords, and vendors require small business owners to personally guarantee contracts, especially if the company is new or has a limited credit history.
Once you sign a personal guarantee, you are legally obligated to pay that debt if the business cannot. Even though the business itself is the contracting party, your personal assets become available for collection if the company defaults.
Tort Liability And Personal Misconduct
Another area of personal liability involves torts, civil wrongs like fraud, defamation, or negligence. Under Illinois law, individuals are personally liable for their own misconduct, even if they were acting on behalf of a business.
For example, if a business owner knowingly makes false representations to a customer or engages in deceptive trade practices, that owner may face individual liability under Illinois tort law and possibly under consumer protection statutes like the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.).
Employment Law Violations
Business owners and managers may also face personal liability for employment-related claims. If an owner directly participates in wage violations, such as failing to pay wages under the Illinois Wage Payment and Collection Act, they may be held personally responsible for unpaid wages and penalties.
Courts have also held individual owners liable for harassment or discrimination under Illinois’ Human Rights Act when they play a direct role in the misconduct.
Tax Liability
Taxes are another area where personal liability can arise quickly and unexpectedly. If a business fails to remit payroll taxes, sales taxes, or withholding taxes to the appropriate state or federal agencies, individual officers or managers can be personally liable for those amounts.
Under the Illinois Department of Revenue Act, individuals responsible for collecting and paying sales tax or withholding tax can face personal assessments if those taxes go unpaid. This includes interest and penalties.
Frequently Asked Questions About Personal Liability For Business Owners
What Is The Most Common Way Business Owners Lose Liability Protection?
The most common way is by failing to keep business and personal finances separate or ignoring corporate formalities. Using business funds to pay personal bills or failing to hold annual meetings and keep records can lead courts to treat the business as a sham, exposing owners to personal liability.
Can Forming An LLC Or Corporation Fully Protect Me From Lawsuits?
Forming an LLC or corporation provides a strong layer of protection, but it is not absolute. Owners must respect the legal separation between themselves and the business. If you commit fraud, act negligently, or fail to operate the business properly, that protection can be lost.
Am I Personally Liable For Employee Wages If The Business Runs Out Of Money?
Possibly. Under the Illinois Wage Payment and Collection Act, individuals who knowingly fail to pay wages can be held personally liable. Courts look at who had control over payroll decisions, not just the company name on the paycheck.
Do I Have To Sign A Personal Guarantee To Get A Business Loan Or Lease?
Not always, but many lenders and landlords require it, especially for new businesses. A personal guarantee means you are personally agreeing to repay the debt if the business cannot. It’s legally binding and enforceable, so it’s important to understand the risk before signing.
Can I Be Sued Personally If My Business Is Sued?
Not unless there’s a valid legal reason to hold you personally responsible. Courts generally respect the separation between the business and its owners. However, if you committed a wrongful act or misused the business entity, a court may allow the lawsuit to proceed against you personally.
Are There Ways To Reduce The Risk Of Personal Liability?
Yes. Keep detailed and accurate records, use separate bank accounts for business and personal expenses, follow all corporate formalities, maintain adequate insurance, and avoid personally guaranteeing unnecessary obligations. We also recommend reviewing contracts and business practices with legal counsel regularly.
Call The Chicago Business Lawyers® To Protect Yourself And Your Business
At The Business Law Group, we help business owners across Chicago structure their operations to limit personal liability and avoid costly legal mistakes. Whether you’re forming a company, signing a contract, or facing a lawsuit, we can help you make sound legal decisions that protect both your business and your personal assets.
Contact our Chicago entity formation attorneys at the Business Law Group by calling (224) 353-6498 to receive your free consultation. At The Business Law Group, we treat your business like it’s our own, because when your business succeeds, so do we. We’re proud to be known as The Chicago Business Lawyers®, and we’re here to support you at every stage of your company’s growth.
The information contained in these blog entries and on this website does not constitute legal advice. While the content discusses various legal issues, it is not intended to and does not provide legal advice. If you are seeking legal advice, you should contact The Business Law Group at 224-353-6498 to schedule a consultation.
