Louisiana business owners often form corporations and LLCs in Louisiana with the assumption that they cannot, as owners of these companies, be held personally liable for any debts or liabilities related to these companies or their operations.  Although Louisiana law provides a general rule of non-liability for these business owners, there is no absolute protection against such personal liability.  Exceptions to this general rule of non-liability are found both in the applicable corporate and LLC statutes themselves, as well as in jurisprudential theories of liability created by the courts.

This article will first address the statutory rules of non-liability and the statutory exceptions found in the Louisiana corporate and LLC laws.

Louisiana Corporations:  The general rule for Louisiana corporations is that a shareholder of a corporation is not personally liable for the acts or debts of the corporation. (See La. R.S. 12:1-622(B)). Under this simple framework, a shareholder could become personally liable in connection with acts carried out in operating the corporation’s business; however, that liability would not arise from the imposition of the corporation’s debt on the shareholder. Rather, the liability would arise from personal duties imposed under other bodies of law, such as tort law and contract law, and so would not operate as an exception to the simple corporate law rule that a shareholder is not personally liable for the debts of the corporation.

The simplicity of the rule stated above was also designed to avoid the confusion and uncertainty that was created by the non-liability provisions of the LLC law, which are discussed below:

Louisiana LLCs:  The liability of members of an LLC is governed by La. R.S. 12:1320(B), which provides, “Except as otherwise specifically set forth in this Chapter, no member, manager, employee, or agent of a limited liability company is liable in such capacity for a debt, obligation, or liability of the limited liability company.”  As this provision suggests, there are exceptions to the limited liability of LLC members.  Statutory exceptions are found in La. R.S. 12:1320(D), which includes (1) fraud, (2) breach of professional duty, and (3) other negligent or wrongful act of an LLC member.  These rules under the LLC law clearly lack the simplicity of the corporate rule discussed above, and it represents what can be fairly seen as a failed attempt by the drafters of the LLC statute to draft an all-encompassing non-liability rule that has actually resulted in weakening the protections provided by the LLC statute.  For years, Louisiana courts have struggled to establish a consistent interpretation and application of these statutory exceptions.  Taking these exceptions in reverse order:

• As for the “negligent or wrongful act” exception, the Louisiana Supreme Court provided some guidance in Ogea v. Merritt, 2013 WL 6439355 (La. 12/10/13), where the Court introduced a 4-factor test that focused on whether the LLC member’s conduct (1) constituted a breach of a duty owed in tort, (2) constituted a crime, (3) was required by, or was in furtherance of, a contract between the claimant and the LLC, or (4) was done outside the member’s capacity as a member.  The Court explained that application of the 4-factor test must be done on a case-by-case basis, and the tort factor alone may be sufficient to find personal liability.  This ruling by the Court in Ogea was possibly aimed at getting the LLC rules closer to the simple corporate rule stated above, where an LLC member’s personal liability in connection with acts carried out in operating the LLC’s business would arise only from personal duties imposed under other bodies of law, such as tort law and contract law; however, some uncertainty remains.

• As for the “breach of professional duty” exception, the Court in Ogea identified the legal, medical, dental, accounting, chiropractic, nursing, architectural, optometry, psychology, veterinary medicine and architectural-engineering professions as being historically recognized within the Louisiana law of business entities.  In Nunez v. Pinnacle Homes, L.L.C., 2015-0087, p. 1 (La. 10/14/15); 180 So.3d 285, the Court held an individually licensed contractor is not a “professional” within the meaning of La. R.S. 12:1320(D).  Aside from this guidance, we don’t have clear understanding of what could amount to a breach of professional duty giving rise to personal liability of an LLC member.  Importantly, the 4-factor test from Ogea does not apply to an alleged breach of professional duty.

• As for the “fraud” exception, courts have looked to the definition of fraud in La. C.C. art. 1953:  “Fraud is a misrepresentation or suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. Fraud may also result from silence or inaction.”

Veil Piercing:  There are limited exceptions to the rule of non-liability of owners for the debts of their entities, where the court may ignore the corporate fiction and hold the individual owners liable.  Such exceptions are the creations of our courts, and this theory of liability continues to evolve.  One such exception is when courts pierce the corporate “veil”, which, much like the Wizard of Oz (“pay no attention to the man behind the curtain”) is a reference to the owners of a company that stand behind the veil of the company and are, under normal circumstances, invisible in terms of legal liability.

Typically, in order to pierce a company veil, there must be some type of “shenanigans” by the owners which inspires courts to defend the interest of creditors, both consensual and non-consensual (tort victims), but this is not always the case.  In Riggins v. Dixie Shoring Co., Inc., 590 So.2d 1164 (La. 1991), the Louisiana Supreme Court found a shareholder was merely an “alter ego” of the corporation and imposed liability.  The court listed a number of non-exclusive factors it considered in reaching its decision: (1) disregarding formalities in forming and running the entity, (2) comingling of corporate and shareholder funds, (3) undercapitalization, (4) failure to maintain separate bank accounts, and (5) failure to hold regular shareholder and director meetings.  It is important to note that these factors are always referred to by the courts as non-exclusive (other considerations may become important) and all factors need not apply to the case at issue.

Single Business Enterprise:  Traditional veil piercing is applied vertically, extending liability up to the owners for the debts of the entity.  The Single Business Enterprise doctrine (“SBE”) is a method for imposing liability on affiliated “sister” companies, and thus operates laterally in a company structure, and permits a court to impose liability to all affiliated entities, thus treating multiple entities as a single enterprise for liability purposes.  The case in which this theory of liability was first created in Louisiana was Green v. Champion Insurance Co., 577 So.2d 249 (La. App. 1st Cir.1991), wherein the court stated: “If one corporation is wholly under the control of another, the fact that it is a separate entity does not relieve the latter from liability. In such instance, the former corporation is merely an alter ego or a business conduit of the latter. When corporations represent precisely the same single interest, the court is free to disregard their separate corporate identity.”  In Green, the court established 18 non-exclusive factors to evaluate to determine if multiple companies in a group should be combined for liability purposes.

While many cases have applied the SBE theory, there may be changes in the future.  In St. Romain v. Cherokee Insurance Company, 328 So. 3d 72 (La. 11/23/21), while denying a writ of review, Justice Crighton quoted the Federal Fifth Circuit Court of Appeals, stating: “…the law on this subject matter is “unsettled” because this Court “has never affirmatively endorsed the single business enterprise theory,” which “has contributed to a hodgepodge of views about the doctrine in lower Louisiana courts.”  Justice Crighton held the view that the Louisiana Supreme Court needed to weigh in on whether Louisiana should have an SBE theory.

Finally, in the last legislative session in 2024, Act 277 was passed into law, and became effective August 1, 2024.  This law, it appears, is intended to address and limit SBE.  In particular, the statute provides that separate juridical entities shall not be disregarded except on grounds that would justify disregarding the separate personality of an entity as between the entity and a natural person.  This appears to be an attempt to legislatively limit cases that have applied SBE merely because there are a number of companies owned under a common umbrella.  However, the specific language of the Act is subject to interpretation, so we will have to wait and see how the courts interpret this new statute in the future to determine its impact on application of the SBE.

Hopefully, this article has made you aware of the potentially dangerous exceptions that apply to the general rule of non-liability for corporate shareholders and LLC members under Louisiana law.  Louisiana business owners should consult their legal counsel to discuss measures that can be taken to mitigate or avoid the risk inherent in these exceptions.  Some companies are able to manage this risk through measures such as (1) indemnification (and advancement of legal expenses) by the company of the owners, and/or (2) director & officer insurance policies.  Other business owners may choose to form their corporation or LLC in a state other than Louisiana, in which case your legal counsel can direct you to a state with more favorable limitation of liability.  Louisiana corporations and LLCs already in existence may also choose to change jurisdictions, in which case your legal counsel can advise on the necessary steps and implications.