In Asset Protection 101, I talked about the importance of shielding your personal assets from business liabilities. I also mentioned that asset protection isn’t unlimited. The veil of protection can occasionally be pierced. But a recent Ohio decision illustrates just how durable the corporate veil really is, and why it’s so important to have a valid corporation in place.

In Lind Stoneworks, Ltd v. Top Surface, Inc., 190 Ohio App.3d 98, 2011-Ohio-2007, the appellant Top Surface, entered into a contract with appellee, Lind Stoneworks. The agreement was that Lind would make counter tops for Top and Top would install them in peoples’ homes. But Top fell about $85,000 behind on its payments to Lind. Eventually Lind filed a lawsuit to collect its unpaid bills.

The trial court in Franklin County determined that Top was liable for the unpaid bills. That was a given. But the court also held that the owner of Top was personally liable for the unpaid bills. Even though Lind hadn’t specifically argued for veil piercing in its complaint, the owner of Top testified at trial that Top was a corporation with no shareholders, officers, or directors … apparently other than the owner himself. The record isn’t clear. At any rate, the trial court thought that was enough to “pierce the veil” of liability protection and hold the owner personally liable.

Now, you’ll recall from Liability Protection 101 that one primary incentives to incorporate or organize an LLC is liability protection. Ordinarily the shareholders, officers, and directors of a company are not liable for the company’s debts. Good deal.

But that veil of liability protection can be pierced, and an individual shareholder, officer, or director can e held liable, if three things happen

First, the individual must completely control the company to the extent that it has no separate “mind, will, or existence.”

Second, the individual must use the company to commit fraud or an illegal act. The Supreme Court of Ohio recently clarified that this means exactly what it says: fraud or illegality is required to pierce the veil. Unjust and inequitable conduct is not enough. Dombrowski v. WellPoint, Inc., 119 Ohio St.3d 506.

Third, all of this control and abuse must have lead to some actual injury or loss to the person filing the lawsuit. Bad behavior alone is not enough. The has to be some genuine damage.

As you can imagine, given these three substantial hurdles, the veil is ordinarily quite sturdy.

So after losing in the trial court on the issue of personal liability, Top Surface wisely appealed. The appellate court reversed. The Tenth District (Franklin County) said that even though Top Surface had presented essentially no evidence that it was a properly operating corporation—and even if that lack of evidence showed that the company had no separate “mind, will, or existence”—still the veil could not be pierced. There was no evidence of overt fraud, so the veil would remain in tact.

The owner of Top managed to avoid personal liability. The company was surely sunk. But its owner was free to pursue new ventures, without the burden of an $85,000 debt.

So what’s the takeaway?

Even a shoddy, unkempt corporation is better than no corporation at all. If Top Surface had been just a dba—a sole proprietor using an assumed business name—its owner would now personally owe $85,000. Because he paid a few bucks at the outset to setup a corporation, he is debt free.