Piercing the Corporate Veil in Wisconsin: When Individuals May be Held Personally Responsible for Business Liabilities
One of the primary reasons business owners choose to organize their business as a corporation or limited liability company is so they are not held personally liable for claims made against the business. The insulation of business owners and managers is known as “limited liability.” Like most states, the general rule on limited liability in Wisconsin is that corporations and LLC’s are legal entities separate and distinct from the individuals who own and manage them. Thus, the obligations of a corporation or LLC are the responsibility of the entity and not individuals. Nevertheless, there are times when courts will look beyond the corporate protection and impose personal liability. When this happens, it is commonly referred to as piercing the corporate veil or the corporate disregard doctrine.
My goal today is to give you a short tutorial on this topic so that you understand what factors courts consider when faced with a claim to pierce the corporate veil.
Tort vs. Contract Liability
As a threshold matter, I want to distinguish between tort and contract liability. An individual is normally personally responsible for his or her own tortious conduct and is not shielded from personal liability by hiding behind the corporate entity. This is true even if the individual is acting for the corporation or LLC. The corporation or LLC may also be liable, but the individual is not relieved of his or her own responsibility. Thus, in determining personal liability in the tort context, the main inquiry is whether the individual personally participated in the tortious conduct.
In contrast to tort law, individuals are normally insulated from personal liability for the debts and contractual obligations of a corporation or LLC unless a court is convinced to pierce the corporate veil. The seminal case on this topic in Wisconsin is Consumer’s Co-op of Walworth County v. Olsen. In that case, the Wisconsin Supreme Court reaffirmed that piercing the corporate veil is an equitable remedy to be applied only in limited situations, such as where it is proved that the corporation or LLC was created as a mere sham to evade creditors or to accomplish fraud or some other illegal purpose.
Consumers Co-op established three elements that must be met before the corporate veil can be pierced. Collectively, these elements are often referred to in the law interchangeably as the “mere instrumentality” or “alter ego” theory of piercing the corporate veil.
Three elements that must be met before the corporate veil can be pierced:
- Show defendant exercised total control over the entity in regard to the transaction
- Show control exercised by defendant was used to commit fraud or some wrong
- Show causal connection of the first two elements described and injury or loss to the plaintiff
The first element a plaintiff must satisfy to pierce the corporate veil is to show that the defendant exercises total control over the entity with respect to a transaction, such that the entity has no separate mind, will or existence of its own. Control and not ownership is the relevant inquiry. When evaluating this element, courts will consider whether certain corporate formalities have been observed, such as:
- Holding corporate board meetings
- Maintaining corporate records
- Intermingling of personal and corporate funds
- Shareholders or members treating corporate assets as their own
- Withdrawals of capital from the corporation at will, and
- Shareholders or members holding themselves out to the public as being personally liable for the corporation or LLC
The second element a plaintiff must satisfy to pierce the corporate veil is to show that the control exercised by the defendant was used to commit fraud or some wrong, to perpetrate the violation of a statutory or other legal duty, or to act dishonestly or unjustly. One factor courts consider when evaluating this element is whether the corporation or LLC was inadequately capitalized at the time of inception, and thus not really a separate entity that could stand on its own. There is no precise formula to guide courts regarding capitalization. Rather, courts will consider the nature and magnitude of the business at the time of inception.
The last element a plaintiff must satisfy to pierce the corporate veil is to show a causal connection between the first two elements I described and the injury or loss to the plaintiff. In other words, did the defendant’s control used to perpetuate fraud or some wrong, cause the plaintiff’s claimed injury. Often a plaintiff will establish causation by showing he or she reasonably relied on an affirmative misrepresentation about the company’s finances made by the defendant.
So, these are the three elements Courts generally consider when deciding whether to pierce the corporate veil in a contract setting. I want to note that courts are also willing to pierce the corporate veil and allow for personal liability when an individual has violated consumer protection statutes, such as Wisconsin’s Home Improvement Practices Act and may do so in similar situations where allowing personal liability furthers public policy.
The analysis courts undertake in determining whether to pierce the corporate veil is fact intensive and subject to considerable discretion. At the end of the day, courts use this equitable remedy to right perceived injustice.
Matt dedicates a substantial portion of his practice to civil and commercial litigation and frequently represent businesses, individuals and government actors throughout Wisconsin in State and Federal courts. For more information on piercing the corporate veil in Wisconsin, please contact Matt at firstname.lastname@example.org or by calling (414) 273-1300.