One of the principal advantages of a corporation is that it is generally 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.

Shareholders, as a general rule, are not liable for the debts of the corporation whose stock they might own. The Louisiana case law recognizes that shielding shareholders 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 "pierce the corporate veil" through to the shareholder personally. If that happens, the shareholder's personal assets, too, as well as the assets of the corporation, become liable to satisfy a judgment - become available to be seized and sold to pay a judgment.

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 in instances of a shareholder, under the guise of a corporation, perpetrating a fraud on an individual.

Fraud was the basis for holding a real estate development company's shareholder personally liable in a suit by a buyer over failure to receive a valid deed after giving the company the sales price. The shareholder of the corporate real estate developer was found to have participated in making false representations to the buyer about whether of not the sale price was actually being held in escrow and the real reasons why the buyer had not received a deed even eighteen months after having paid the sale price.

There are circumstances other than fraud that will also give rise to a finding that a corporation is the alter ego of a shareholder. For example, in a situation where shareholders disregarded the requisite corporate formalities to such an extent that the corporation ceased to be distinguishable from its shareholders, the courts have pierced the corporate veil through to the shareholders in their individual capacities.

Some of the factors the courts consider when determining whether to pierce the corporate veil are: (1) a commingling of corporate and shareholder funds and other assets; (2) a failure to follow statutory formalities for incorporating and for transacting corporate affairs once incorporated; (3) an under-capitalization of the corporation; (4) failure to maintain separate bank accounts and bookkeeping records; and (5) failure to hold regular shareholder or director meetings. Additional factors that may be considered are failure to pay dividends and withdrawal of corporate funds for the personal use of shareholders.

Louisiana courts have usually not pierced the corporate veil solely because one shareholder owns a majority of stock or even all of the stock; the corporation is minimally capitalized; or, the corporation was created by the shareholder for the sole purpose of avoiding personal liability.

One should realize, too, that courts may also pierce the corporate veil from one corporate entity to another. The "single business enterprise" or "instrumentality" theories have been used by the courts to extend liability beyond one entity to a related entity. Where two or more corporations operate a single business, courts have imposed liability on the affiliated corporation even though not directly involved in the transaction at issue in a suit. If those corporations integrate their resources to achieve a common business purpose and do not operate as distinct entities separate from each other, each affiliated corporation may be held liable for debt incurred in pursuit of the "group" business purpose. Thus, the "fragmentation" of a business activity will not always result in an insulation of liability, will not always result in isolating liability in just one corporate entity.

In the course of making a determination of whether one corporation is an alter-ego, or even agent or tool, of another corporation, a court is required to look to the substance of the corporate structure rather than its form. Numerous factors are considered in deciding whether separate corporations are to be treated as a single business enterprise, as having a group business purpose. Some of the factors considered are: common directors or officers; identical or substantially identical ownership (ownership of sufficient stock to give actual working control); unified administrative control of corporations whose business activities are similar; one corporation financing another corporation; centralized accounting; common employees and office facilities; noncompliance with corporate formalities; undocumented transfers of funds back and forth between or among corporations; unclear allocations of profits and losses between corporations; and, excessive fragmentation of a single enterprise into separate corporate entities.

The foregoing is not an exhaustive list of the relevant factors. And, neither will the presence of one single factor cause a court to rule that there is or has been a "single business enterprise," a "group business purpose." As just one example, a court will not pierce from one corporation to an affiliated corporation simply because those corporations have stockholders and officers in common.

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