Many of my friends know that the late Justice William O. Douglas, a rugged outdoorsman, rail hobo, eloquent author, world traveler, environmental activist, FDR’s poker buddy, and brilliant jurist, is one of my heroes. His iconic autobiography, Go East Young Man, rests on my office shelf. So I was delighted when I discovered that he had written the words excerpted below, which remain Georgia’s black letter law on the subject, in 1929 as a Professor in a Yale Law Journal article titled “Insulation from Liability Through Subsidiary Corporations” .
Then-Professor Douglas, who as an impoverished boy had strengthened his polio-scarred legs by hiking the Cascade Mountains near his hometown of Yakima, Washington, went on to head the SEC and then become the longest serving United States Supreme Court Justice.
Professor Douglas’s article still matters today to you if your business operates through more than one limited liability entity (i.e., a corporation, limited partnership, or limited liability company). The rules he laid out below apply whether the limited liability entities are side-by-side or vertical.
In our practice we have seen much financial suffering over the years from hasty proliferation of various business entities under one roof, when some of them have “no real business” – or the wrong business – in them.
A key excerpt from the article follows. It is difficult to improve on the words even though now over eight decades old:
The observance of the following four standards will keep the business units from being treated as assimilated: (1) A separate financial unit should be set up and maintained. That unit should be sufficiently financed so as to carry the normal strains upon it. The risks attendant on the conduct of a business of that type can roughly be averaged and that average met. (2) The day to day business of the two units should be kept separate. Normally each process can be tagged so as to identify it with the activity of one unit or with that of the other. Occasionally such tagging will be difficult in a case where the two businesses are merely units in a line of production. But such separation as the technology of the business permits should be sufficient. And in addition the financial and business records of the two units should be separately kept. (3) The formal barriers between the two management structures should be maintained. The ritual of separate meetings should be religiously observed. The activities of the individuals serving on the two boards can be tagged so that the individuals qua directors of the subsidiary can always be distinguished from the same individuals qua directors of the parent. Such tagging is not pure fiction. It draws the line that keeps the dual capacities separate and distinct. It conforms to the habit of thought which accepts the fact of dual capacity but which demands a separation of conduct so that each act may be clearly categorized. Separate meetings of the boards are sufficient. The same problem arises in connection with the officers. And the same solution suggests itself. A man may not be indiscriminately one officer or another. The observance of the niceties of business efficiency are normally sufficient. Such demands are not exacting. They merely suffice to keep the record of the business affairs of the two units from becoming hopelessly intermingled. (4) The two units should not be represented as being one unit. Those with whom they come in contact should be kept sufficiently informed of their separate identities.
Conformity with the above standards is all that normally could be required of two units so closely connected. With exceptions to be noted, it will generally suffice to set up the desired nonconductor of liability…”1
The above statement appears today almost verbatim in the best-recognized treatise on Georgia corporate law, Kaplan’s Nadler Georgia Corporations.
- Anyone whose business operates through more than one limited liability entity should be mindful of these standards if, as is almost certainly the case, a goal is to preserve each entity’s liability shield.
- There are various ways, other than by violating the rules above, by which third party creditors can pierce a “corporate veil”. Naturally, this blog is not a full exploration of the subject or of any exceptions or nuances to the rules.
- General partnerships offer no liability protection to their partners and are therefore outside the scope of this blog.
- Anyone operating a business(es) through more than one limited liability business entity could be well served by initiating a legal and financial review, to increase the likelihood that those limited liability entities meet these general standards.
- Details matter. Remember that “as the owner treats limited liability entities, so too can the world”. So if during the good times one treats entities interchangeably or with blurred lines, then so too can the world during the bad times. Don’t let it happen to you.
— Laurance D. Pless
 Insulation from Liability Through Subsidiary Corporations by William O. Douglas and Carrol M. Shanks, 39 Yale Law J., 193 (1929)