Source: https://www.ws-law.com/asset-protection/asset-protection-veil-piercing/
Timestamp: 2019-05-21 06:30:20
Document Index: 690756548

Matched Legal Cases: ['§101', '§101', '§21', '§21', '§21', '§ 171']

Asset Protection: Veil Piercing - Waldron & Schneider
Asset Protection	 January 16, 2019 admin
Our July 23, 2018 blog entry, Asset Protection: The Filing Entity, explains how a filing entity such as a corporation or LLC is designed to protect personal assets from the risks of owning and operating a business. But, what about “piercing the corporate veil?”
Piercing the corporate veil–veil piercing–occurs when a court looks beyond the assets of the entity to the personal assets of its owners to satisfy the debts, liabilities, or other obligations of the entity. Historically, Texas permitted veil piercing when an entity (1) was the alter ego of its owners, (2) was used for an illegal purpose, or (3) was used as a sham to perpetrate a fraud. Numerous legal theories, tests, and/or factors developed under these three broad categories of veil piercing.
Presumably, in light of the proliferation of veil piercing litigation and liability exposure that, for practical purposes, was undercutting the public policy in favor of providing personal asset protection through the use of filing entities, the Texas legislature stepped in. In 2006, the legislature enacted Texas Business Organizations Code (“TBOC”) §101.114 titled “Liability for Obligations.” TBOC §101.114 states that “[e]xcept as and to the extent the company agreement specifically provides otherwise, a member or manager is not liable for a debt, obligation, or liability of a limited liability company, including a debt, obligation, or liability under a judgment, decree, or order of a court.”
TBOC §21.223, titled “Limitation of Liability for Obligations,” also limits historical veil piercing theories with the following language:
However, TBOC §21.223(b) left open a single avenue for veil piercing when the obligation arose from or related to a contractual relationship and the entity was used to perpetrate an actual fraud primarily for the direct personal benefit of the owner.
Although TBOC §21.223(a)(3) expressly eliminates the “failure to follow corporate formalities” commonly pointed to in historical veil piercing law, it is still best practice to follow corporate formalities to avoid failure to do so being pointed to as part of an alleged actual fraud. Further, if multiple entities are oned, it is best practice to avoid undocumented transfers between the entities, sharing employees and the same accounting system, one entity paying the wages of the other entity, and unclear allocation of profit and loss between the entities.
Veil piercing based on the Texas Tax Code
Texas Tax Code § 171.255 establishes that directors, officers, and managers of a filing entity have personal liability for the debts of the entity when the filing entity privileges are forfeited for failing to timely file a report or pay a tax or penalty. The time period of personal liability exposure extends from the date the report, tax, or penalty becomes due until the entity privileges are revived.
Although I am an attorney, the legal information in this blog entry is not intended to be a substitute for seeking personalized legal advice from an attorney licensed to practice in your jurisdiction. Further, I do not intend to create an attorney-client relationship with any reader. This Blog/Website is made available by Waldron & Schneider for educational purposes only as well as to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and Waldron & Schneider. The Blog/Website should not be used as a substitute for competent legal advice from a licensed professional attorney in your jurisdiction.
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