Piercing the Corporate Veil

If your Texas business is organized as a sole proprietorship or general partnership, then the law recognizes no distinction between your personal and business assets. This is why many businesses choose to organize as a corporation or limited liability company, which provides a powerful liability shield for individual owners, directors, and officers to avoid being held personally liable for the debts and legal obligations of the business.

But there are some situations where a creditor may seek to disregard the corporate liability shield and “pierce the corporate veil.” The experienced Texas business attorneys at Structure Law Group can review your corporation’s situation and advise you of the risks.

Texas Imposes a High Bar for Holding Individual Shareholders Liable

In a 1986 decision, Castleberry v. Branscum, the Texas Supreme Court established a broad standard for piercing the corporate veil when individual shareholders, officers, or directors “abuse the corporate privilege.” But in the intervening years, the Texas legislature narrowed the scope of the Court’s ruling through statutory amendments to the Texas Business Organizations Code. Under the current version of Section 21.223 of the Code, shareholders of a corporation or members of a limited liability company may only be held personally liable for the contractual obligations of a business when there is proof that an individual committed “actual fraud” for their personal benefit.

In practical terms, this means it is not enough under Texas law to show that an individual may have created a “sham company” or was otherwise using a corporation or LLC as an “alter ego” for themselves. Rather, a plaintiff must prove that an individual defendant directly used the corporation or LLC to commit fraud against the plaintiff for the personal benefit of the defendant.

It is important to note, however, that Section 21.223 only applies to shareholders or members and not to individuals who serve as officers or directors of a corporation or LLC. Indeed, there are certain situations where an officer or director can be held personally liable for the debts of a business. The most common example is taxes. If a Texas corporation or LLC fails to pay its taxes, the state can declare the corporation or LLC “forfeit” and seek payment of any past-due taxes from each officer or director individually. Similarly, the IRS typically disregards the legal status of an LLC for federal income tax purposes, so each individual member can still be held personally responsible for the payment of any tax debts.

Contact Structure Law Group Today

Piercing the corporate veil is a common tactic plaintiffs employ in business lawsuits, even though Texas law makes it relatively challenging to achieve. However, if your business is facing a lawsuit, taking such claims seriously is essential. Our qualified Texas business litigation attorneys can review your case and help you develop a strategy for moving forward. Call SLG today at (512) 881-7500 or contact us online to schedule a consultation.