Several of our clients operating as limited liability companies (LLCs) have recently inquired about an amendment that was made to the Texas Business Organizations Code (“BOC”) during the busy 82nd Texas Legislative Session. This amendment, SB 323, expressly makes members and managers of LLCs subject to the same personal liability standards for piercing the corporate veil that apply to shareholders and directors of for-profit corporations…In other words, the personal liability shield afforded members and managers of LLCs is now no better than that afforded shareholders and directors of corporations.
Prior to this amendment, Section 101.114 of the BOC provided that a member or manager was not liable for the debts, obligations or liabilities of a limited liability company, unless the company agreement or regulations specifically provided otherwise. This concept of statutory limited liability seemed to provide members and managers an absolute shield against any personal liability whatsoever. However, recent court cases in Texas involving LLCs applied a different section of the BOC, Sections 21.223-21.226, which provides corporate veil piercing principals (including alter ego, sham corporation and perpetrating actual fraud). This confusion with the BOC provisions, and between the state and federal court interpretations, created a significant conflict as to which were the proper BOC standards to be applied to LLCs.
In adopting the standards set forth for for-profit corporations, SB 323 now clarifies the standards for the piercing of the liability shield for LLCs. This effectively brings the BOC more in line with applicable case law, and expressly provides that the corporate veil piercing standards found in Sections 21.223, 21.224, 21.225 and 21.226 of the BOC apply to LLCs and their respective members, owners, assignees and subscribers, subject to the limitations contained in section 101.114.
As a result, though the question of the extent of liability protection provided by LLCs may have been clarified, members and managers of Texas LLCs face the possibility of greater liability exposure with respect to their LLCs.
Contributed by Paul Roslyn; 713.850.2387 or email@example.com.