One of the primary ways individuals often try to protect their personal assets is by forming a separate legal entity under Texas law. Some of the common legal entities, both in Texas and nationally, include: limited liability companies (LLCs), corporations, and partnerships. However, we do not advocate use of any of these entities to protect one’s assets as we believe there is a much better option under Texas law.
This superior option is called the Texas Joint-Stock Company. The Texas Joint-Stock Company offers a host of benefits as compared to the other legal entities, which we have previously discussed. In our previous blog post, we discussed a letter we sent out to property and business owners pointing out some of the major shortcomings of traditional Texas legal entities. In that letter, we talked about the concept of “piercing . . . the [corporate] veil.”
Piercing the Corporate Veil
What is “piercing the corporate veil,” one may ask? Put bluntly, “piercing the corporate veil” is a legal concept that can expose shareholders’ personal assets to seizure despite the protection the corporation, in theory, should provide against this very risk. This doctrine is an exceptionally dangerous weapon as it can enable unscrupulous plaintiffs to successfully seize one’s personal assets!
As noted by Elizabeth S. Miller, professor of law at Baylor Law School, “piercing the corporate veil” is a concept that applies to various types of legal entities, such as LLCs, despite the use of the word “corporate.” The concept revolves around the notion that separate legal entities provide a protective veil shielding shareholders’ personal assets. The veil is “pierced,” so to speak, when a plaintiff can show that the corporation is an “alter ego” of the shareholders.
This concept is more easily understood by looking at two of the most common ways plaintiffs can successfully “pierce the corporate veil” of a valid Texas legal entity. The first example involves a “lack of formality,” and the second example pertains to a “commingling of funds.”
Lack of Formality
When an individual creates a separate legal entity in Texas, such as a corporation, the corporation is required to follow certain formalities, such as holding an annual shareholder’s meeting. Sometimes, however, companies do not hold such meetings because, perhaps, the corporation is small and the shareholders of the corporation are in frequent contact. Texas statutory law expressly says that failing to adhere to formalities, such as holding annual meetings, should not result in “piercing the corporate veil.” However, some courts in Texas continue to suggest that failing to follow formalities could result in “piercing the corporate veil.” Please see a case called S-Line LLC v. B2B for a recent example of when a Texas court stated that failing to follow formalities could “pierce the corporate veil.”
Commingling of Funds
Another common way a plaintiff can “pierce the corporate veil” is when there has been a commingling of funds. Sometimes an individual who owns a business will use the business bank account and his or her personal bank account interchangeably. For example, the individual may receive revenue on account of a service provided through the corporation and deposit the revenue directly into his or her personal bank account instead of properly routing the funds through the business bank account. A court may decide that such a practice is an improper “commingling of funds.” Such a finding could result in the court “piercing the corporate veil” to allow the plaintiff to seize personal assets of the defendant. Please see the case entitled In Re Arnette for an example of when a Texas court noted that a commingling of funds could lead to “piercing the corporate veil.”
We Can Help
“Piercing the corporate veil” severely limits the personal asset protection afforded by the most common Texas legal entities. Accordingly, that is why we recommend the Texas Joint-Stock Company. Contact us today so that we can help you use the Texas Joint-Stock Company for the best possible protection of your assets.