Whether you are just starting a new venture or growing your business beyond a sole proprietorship, you will inevitably reach a point where you want to ensure that your personal assets will not be vulnerable in the event that lawsuits or other liabilities confront your business. In the world of small business, there are two clear vehicles to accomplish that goal: a limited liability company (LLC) or an S-corporation (often shortened to S-corp).
Both LLCs and S-corps do what sole proprietorships do not, and that is remove your personal assets from the reach of your business creditors. Many small business owners often choose to form LLCs because of the perception that there are fewer corporate “formalities” then there are for corporations. While that is largely true, LLC owners who fail to maintain and treat the LLC as a separate entity expose themselves to the very personal liability for corporate obligations that led them to form the entity in the first place.
“Piercing the Corporate Veil”
As the Louisiana Supreme Court explained in a 2013 decision,
“when individual member(s) of a juridical entity such as an LLC mismanage the entity or otherwise thwart the public policies justifying treating the entity as a separate juridical person, the individual member(s) have been subjected to personal liability for obligations for which the LLC would otherwise be solely liable. When individual member(s) are held liable under such circumstances, it is said that the court is “piercing the corporate veil.”
Ogea v. Merritt, 13-1085 (La. 8/30/13), 120 So.3d 251 (2013)
Louisiana’s LLC law specifically provides that members of an LLC are not to be held liable for the obligations of the company except in circumstance of fraud, breach of professional duty (such as medical or legal malpractice) or negligent or wrongful acts by a member outside of their capacity as a member of the LLC.
However, Louisiana courts have held that LLC members can also be held personally liable under what is known as the “alter ego” theory of liability; that is, the member or members of the LLC so disregard the legal fiction of the LLC as a separate entity that it really is simply the “alter ego” of the member or members.
Courts have used five factors to determine whether an LLC should be considered the “alter ego” of its owners such that they should be held personally liable for the LLC’s obligations:
Commingling funds between the LLC and its members
Failure to provide separate bank accounts and records
Failure to follow corporate formalities
Failure to hold regular meetings
Especially in single member LLCs or LLCs with very few members, it can be tempting to disregard certain formalities in the name of convenience, even if there is no intent to defraud or otherwise engage in any impropriety. But if you are an LLC owner in Louisiana, it is critical that you understand that the protections afforded to your assets aren’t set in stone just because you formed an LLC. Unless you conduct your business in a way that makes clear that the LLC is in fact a separate business, creditors and others may be able to “pierce the corporate veil” and leave you and your personal assets exposed to significant liability.
A Full-Service Louisiana Business Litigation Law Firm
At Galante & Bivalacqua, we understand the sacrifice and hard work required to run a successful business, as well as the risks and rewards involved in a real estate transaction or dispute. Whether you are an established business or you’re looking to form a new organization, we are privileged to assist you as you safeguard your assets and pursue new goals. Contact us today at (504) 648-1858 to speak to a business attorney who can help.
This article has been prepared by Galante & Bivalacqua for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.