Piercing The Corporate Veil
Piercing The Corporate Veil Texas
Business Attorneys – Houston, Tx
LLCs, Corporations & Other Business Entities
It is possible to hold individuals that run a corporate entity liable for the corporation’s or LLC’s actions and debts. This is called Piercing the Corporate veil. In this situation, the people behind a corporation are no longer protected by limited liability.
Limited liability means that a member or manager is not liable for debt, obligation or liability of a limited liability company. Piercing the veil is rarely used as a remedy.
When Is Piercing The Corporate Veil Permitted In Texas?
How can you plead piercing the corporate veil?
Before 2006, Texas law permitted Piercing the corporate veil when:
- The corporation is the alter ego of its owners and/or shareholders
- The corporation is used for illegal purposes
- The corporation is used for criminal activities or fraud
But all this was cast aside in 2006 when the legislature significantly reduced the avenues for piercing. The legislature used the following language to limit veil piercing avenues:
(a) A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate of such a holder, owner, or subscriber or of the corporation may not be held liable to the corporation or its obliges with respect to:
(1) the shares, other than the obligation to pay to the corporation the full amount of consideration, fixed in compliance with Sections 21.157-21.162, for which the shares were or are to be issued;
(2)any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory; or
(3) any obligation of the corporation on the basis of the failure of the corporation to observe any corporate formality, including the failure to:
(A) comply with this code or the certificate of formation or bylaws of the corporation; or
(B) observe any requirements prescribed by this code or the certificate of formation or bylaws of the corporation for acts to be taken by the corporation or its directors or shareholders.
(b)Subsection (a)(2) does not prevent or limit the liability of the holder, beneficial owner, subscriber, or affiliate if the oblige demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the oblige primarily for the direct personal benefit of the holder, beneficial owner, subscriber , or affiliate.
Meaning Of Alter Ego
Alter Ego Theory of Liability
When it becomes difficult to separate the corporate entity and the individual, courts are more likely to hold the individual liable when a suit is filed against the corporation. The alter ego theory applies in situations such as:
- When the method used to allocate profits and losses between the two entities is unclear
- When one corporation pays wages of employees of another corporation
- When the two entities share accounting, offices, business name or employees
- When there are transfers between two entities that are undocumented