One of the principal advantages of engaging in business as a corporation is that a corporation is recognized as a distinct legal entity, a legal entity separate from, and with an existence separate and distinct from, the individuals who make it up.

As a general rule, individual shareholders are not personally liable for the debts of the corporation whose stock they might own. The Louisiana case law recognizes that shielding a shareholder’s personal assets from liability for corporate debt encourages business investments, especially in high-risk endeavors. Thus, courts are reluctant to disregard the limited liability that is part of corporate stock ownership, unless exceptional circumstances are found to be present.

When circumstances are present, however, a court will not hesitate to disregard that limited liability and pierce the veil or shield of the corporation through to the shareholder personally. If that happens, the shareholder's personal assets, as well as the assets of the corporation, will become liable to satisfy a judgment — will become available to be seized and sold to pay a debt or judgment against the business.

The corporate veil will be pierced when the court finds that a corporation is merely the "alter-ego" of the shareholder. A finding such as this may occur when a shareholder, under the guise of a corporation, perpetrates a fraud on an individual. For example, fraud was the basis for holding a real estate company’s shareholder personally liable in a lawsuit by a buyer over failure to receive a valid deed, because the shareholder was found to have participated in making false representations to the buyer about the escrowed sales price.

Louisiana courts have usually not ignored the corporate shield solely because one shareholder owns a majority of stock or even all of the stock, or when the corporation was created by the shareholder for the sole purpose of avoiding personal liability.

Some of the factors other than fraud that courts consider when determining whether to ignore or disregard the corporate shield are:

• commingling of corporate funds with a shareholder’s personal accounts and funds

• failure to follow statutory formalities for incorporating and for transacting corporate affairs once incorporated

• under-capitalization of the corporation

• failure to maintain separate bank accounts and bookkeeping records

• failure to hold regular shareholder or director meetings

• failure to pay dividends and withdrawal of corporate funds for the personal use of shareholders.

Business owners should not be put off by doing these things, as these are easy to accomplish and will quickly become second nature.

Although there is no single formula or litmus test that can be applied in every instance, courts will in fact respect, will rule in favor of, the corporate form. Corporations and their shareholders must, however, be certain to follow corporate formalities – be certain to themselves respect the corporate form – in order to have the greatest likelihood of successfully shielding personal assets from creditors of their corporate business enterprise.

If you have any issues involving business or corporation laws, I would appreciate a chance to assist you.

Republished | Originally published on December 1, 2004

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Disclaimer: This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.