Every person has skin and bones that protect their body from bumps and bruises from the outside world. A corporation or other business entity is no different. In short, a corporation (or limited liability company or partnership) is a legal “person.” The corporate body is supposed to protect the owners from bumps, bruises and liabilities that occur every day in the business world.
Shareholders of a corporation (or owners of an LLC or partnership) are not supposed to be liable for corporate debts (including judgments). That is why most people - even lawyers - choose to do business in some corporate form, rather than individually, in order to protect their personal assets from business liabilities.
However, this liability protection is not absolute. If the formalities of the business structure (whether a corporation, partnership or LLC) are not respected, the “body” of the corporation may be disregarded, which means that the owner(s) of the business are personally liable for corporate debts and judgments. This is commonly referred to as “piercing the corporate veil.”
While piercing the veil is an extreme judicial remedy, it does happen. A recent case in point is Fausse Riviere v. Snyder, 16-0633 (La. App. 1 Cir. 2/15/17) _____ So.3. _____, 2017 WL 639396. In this case, the Louisiana First Circuit Court of Appeal affirmed a trial court ruling that a series of single member limited liability companies should be disregarded because they were the "alter ego" of the sole owner, John Snyder. As such, Mr. Snyder was held personally liable for significant debts of his LLCs.
In the Court's own words:
"The court may pierce the corporate veil under two exceptional circumstances. First, where the shareholders, acting through the corporation, commit fraud or deceit on a third party, the court will look to the shareholders for justice. Secondly, the court may disregard the corporate identity where shareholders fail to conduct the business on a corporate footing. Such a failure can occur if the shareholder disregarded the corporate formalities to such an extent that the shareholder and the corporation became indistinguishable, or such unity existed that separate individualities ceased and the corporation was operated as the “alter ego” of the shareholder." Id.
"Some of the circumstances that may point to a disregard of the corporate identity are: (1) commingling of corporate and shareholder funds; (2) failure to follow statutory formalities for incorporating and transacting corporate activities; (3) under-capitalization; (4) failure to provide separate bank accounts and bookkeeping records; and (5) failure to hold regular shareholder and director meetings. (citation omitted) The involvement in the corporate business of the sole or majority shareholder is insufficient alone to establish a basis for disregard of the corporate entity." Id.
Basically, Mr. Snyder commingled all of the affairs of his various business entities, which caused them all to collapse under the eyes of the law. He failed to respect the formalities of the entities as separate and distinct from each other and separate from himself, which is an easy trap to fall into when the sole owner of a business is accountable to no one but himself or herself.
Personal liability for corporate obligations can easily be avoided with minimal attention to the corporate niceties. In a very general sense, an owner must simply respect the business as a separate legal person and observe some basic formalities. This means do not commingle business and personal funds (i.e., do not buy groceries with the business card), establish and document a process for decision making, periodically elect or appoint officers and directors or managers, file annual reports and keep good records, including minutes and resolutions (Note: specific record keeping requirements exist under law). The owners of the business should adopt written bylaws (or an operating or partnership agreement), which is the rule book for decision making - and follow the rules.
The process of decision making, and not necessarily the decision itself, is often the focus of court scrutiny when a challenge is posed to the decision makers and owners of a business. Without a decision making process, the stakes go up. Good governance is the key.
Good governance is not difficult and should be routine. However, it requires some work in establishing and following procedures and for that reason (and because its not a problem until someone makes it an issue), it often gets overlooked, shortcut or ignored. It is well worth the trouble for a business owner to periodically review the most basic corporate formalities and to regularly perform a business checkup of sorts to ensure the trap door is and remains closed. In the realm of integrated asset protection planning which utilizes limited liability companies as part of an over-arching estate plan, the case of Fausse Riviere should be required reading.
As Benjamin Franklin once said, “an ounce of prevention is worth a pound of cure.” In other words, legal nightmares can be avoided with a few easy preventative legal measures.
Theus Law Offices provides a complete range of business, estate and asset protection services. If you are faced with a claim and need a Louisiana asset protection attorney familiar with corporate veil piercing concepts in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe, Central Louisiana or elsewhere, let our asset protection attorneys help you.
