As a Texas LLC owner, member, or manager, you've made a strategic choice to separate your business and personal finances through a limited liability company structure. This critical legal barrier provides valuable protection, but it isn't impenetrable.
While Texas offers some of the strongest liability shields in the nation, understanding the circumstances under which creditors can "pierce the corporate veil" is essential to maintaining your personal financial security.
This comprehensive guide examines the specific requirements for veil-piercing in Texas and provides actionable strategies to reinforce your LLC's liability protection, ensuring your personal assets remain secure even during challenging business circumstances.
What Is Piercing the Corporate Veil of an LLC?
By forming an LLC, you create a shield against personal liability. For example, if your business fails, you must pay your creditors – but only your LLC’s assets are at risk. Your personal bank account, your home, and other property are safe.
In some situations, however, Texas law allows creditors to “pierce the veil” or reach past the liability shield. Piercing the veil usually means making you personally accountable for the debts and liabilities of your LLC.
Can Someone Sue Me to Pierce the Veil of my Texas LLC?
Not exactly. A plaintiff must have a legal claim or “cause of action” to file a lawsuit. Piercing the veil, by itself, is not a cause of action. Rather, it is a remedy to help plaintiffs recover damages for claims against your business.
A plaintiff would have to sue you for another reason, like fraud or breach of contract. If they were able to prove their claim, the plaintiff could then attempt to pierce the veil of your LLC to access your personal assets to recover monetary damages.
What Is Required to Pierce the Corporate Veil of an LLC in Texas?
To pierce the corporate veil of an LLC in Texas, a plaintiff must prove two essential elements:
- The individual or business committed actual fraud (Texas courts usually interpret “actual fraud” as “involving dishonesty of purpose or intent to deceive”); and
- This fraud was perpetrated primarily for the direct personal benefit of the individual or LLC.
Examples of actual fraud that might leave you exposed to veil-piercing may include:
- Removing assets from an LLC to avoid a legal judgment or creditors
- Falsifying financial statements or bank documents to secure a business line of credit used for personal expenses
- Collecting advance payment for an LLC contract, diverting those payments for personal use, and later breaching the contract
- Overbilling LLC customers and personally pocketing the excess payments
How to Prevent Piercing the Corporate Veil of Your Texas LLC
There are several steps you can take to strength the liability shield of your LLC and prevent veil-piercing:
- Maintain strict financial separation between your personal and business finances. Never commingle funds.
- Document all transfers between you and the company as either loans (with formal terms) or capital contributions
- Properly capitalize your LLC to ensure it has sufficient funds to meet its obligations
- Always sign documents in your capacity as an LLC member/manager, not personally
- Pay yourself a reasonable salary rather than taking money at will
- Never use the LLC to perpetrate fraud or illegal activities
At Hendershot Cowart, our business attorneys can help you strengthen your liability shield against potential creditors. Contact us today to schedule a consultation.
What’s the Difference Between Piercing the Veil of an LLC and Piercing the Veil of a Corporation?
Under Texas law, there is no difference.
Texas law explicitly limits liability for LLCs. It also states that the corporate liability shield applies to LLCs. Texas courts have consistently used the same principles to analyze veil-piercing for both LLCs and corporations.
Are There Special Considerations for Piercing the Veil of Single-Member LLCs vs. a Multiple Member LLC?
Not in Texas. The Texas liability shield is the same for single-member LLCs and multiple-member LLCs.
Don't Let Creditors Break Through Your LLC Shield
Your liability shield is only as strong as your business practices. Take proactive steps now to reinforce your LLC's protection and safeguard your personal assets from potential creditors.
Call (713) 783-3110 or contact us online to schedule your LLC protection review today. Our team can identify vulnerabilities in your current structure and develop customized strategies to strengthen your defenses against veil-piercing claims.