Keeping the Limit in "Limited Liability": Owners of Multiple Businesses Must Guard Against Enterprise-wide Liability in Louisiana

While most business owners are familiar with the need to form an entity to insulate personal assets or an existing business from liability associated with a new or different business, there is an additional type of liability exposure that should be considered by owners of multiple business entities: enterprise-wide liability imposed under Louisiana’s single business enterprise ("SBE") doctrine.

Application of the SBE doctrine imposes liability on a group of affiliated companies, for the liability incurred by one of the entities, if certain factors are present. The SBE doctrine, first announced in Green v. Champion Ins. Co., 577 So.2d 249, 257 (La. App. 1st Cir. 1991), was adopted and is used by courts to prevent fraud on creditors that may occur if an entity that is directly liable for a claim is, or has been made, judgment-proof, while closely affiliated with an otherwise prosperous group of entities. In order to determine whether the SBE doctrine is appropriate in a given case, Louisiana courts examine 18 non-exclusive factors to determine whether the assets of a group of affiliated entities should be available for satisfaction of a claim against a judgment-proof entity that has direct liability. The 18 factors identified by the Green court as indicative of an SBE are:

1.  identical or substantially identical ownership sufficient to allow actual working control;

2. common directors or officers;

3. unified administrative control of entities whose business functions are similar or supplementary;

4. whether directors and officers of an entity act independently in the interest of that entity;

5. whether one entity finances another, affiliated entity;

6. inadequate capitalization ("thin incorporation");

7. an entity causes the organization of affiliated entity(ies);

8. one entity pays the salaries and other expenses or losses of another entity;

9. an entity receives little or no business other than from its affiliated entities;

10. an entity uses the property of another entity as its own;

11. noncompliance with corporate formalities;

12. common employees;

13. services rendered by the employees of one entity on behalf of another entity;

14. common offices and facilities;

15. centralized accounting;

16. undocumented transfers of funds between entities;

17. unclear allocation of profits and losses between or among entities; and

18. excessive fragmentation of a single enterprise into separate entities.

A concern with the SBE doctrine is that many of these "factors" are present in most groups of closely held businesses, without any intention of defrauding creditors. For example, closely held, affiliated businesses have, by definition, similar owners, directors, and/or officers, and the existence of other "factors" are typical and important to achieve operating efficiencies. There are, however, actions that should be taken to defend against the allegation of SBE. Making sure to follow corporate formalities and document any and all transactions between or among affiliated entities, for example, is very important for defense against a claim of SBE, along with avoiding the fact or appearance that the sole purpose of affiliated entities is to serve (and protect from liability) a dominant, principal entity.

If you have concerns regarding potential SBE liability and would like to discuss steps you can take to protect your businesses from SBE exposure, please contact us for more information.

             Author: Keith J. Fernandez              Practice Area: Corporate Law              Date: February 1, 2015

Disclaimer: The information provided herein (1) is for general information only; (2) does not create an attorney-client relationship between the author or the author’s firm and the reader; (3) does not constitute the provision of legal advice, tax advice, or professional consulting of any kind; and (4) does not substitute for consultation with professional legal, tax or other competent advisors. Before making any decision or taking any action in connection with the matters discussed herein, you should consult with a professional legal, tax and/or other advisor who should be provided with all pertinent facts relevant to your particular situation. The information provided herein is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information.