Doing Business in Texas: Business Liability
Perhaps the top consideration for any business owner is the type of liability they may face for operating a business. There are contractual liabilities and tort liabilities. Contractual liabilities are those that arise out of a contract. Tort liability occurs as when a wrong is committed against another, it is a civil lawsuit between parties.
The core of Texas’ limited liability laws is the Texas Business Organizations Code (TBOC). This all encompassing set of laws includes the rules and regulations that apply to the many different business entities. Among these rules are whether business owners can be personally liable or not for actions of their business.
The two most popular business entities, corporations and limited liability companies, have similar provisions protecting owners and shareholders alike. Both have limited liability, which provides that acts undertaken by the corporation are not automatically imputed to the shareholders or owners. Both also have provisions in the law that prevent personal liability of owners for contractual obligations of the entity unless an actual fraud can be proven. The Texas Supreme Court has made it clear that the corporate shield will not be easily disregarded as recently as 2006, noting it should only occur in “extraordinary circumstances.”
Contractual obligations to owners of an entity have become harder to impose, absent a personal guarantee, in recent history with the Texas legislature amending the TBOC in 1993 and 1997 to limit the sole method of piercing the veil for contractual liability to a showing of actual fraud. The current version of the TBOC explicitly states that absent a company agreement that states otherwise owners are not liable for a debt, obligation, or liability of a corporation or LLC.
Tort liability for Texas business owners is not as straightforward as contract liabilities. Tort liabilities must find a way to pierce the veil to impose judgements on business owners. The most popular tort theory to sue a business under is negligence. Negligence can encompass many different actions including: slip and falls, dangerous conditions, vehicle accidents, and even faulty products. As business owners compare different entity types, states, or even countries Texas shines as one of the premier regions to do business. Texas protects business owners and entities with strong limited liability laws and business friendly courts.
When a tort claim is brought against a Texas business, there are two theories used by Texas courts to the transfer liability of the business to the owners or shareholders (called piercing the veil) of corporate and LLC liability protections. The first and most popular theory used to pierce the veil of corporations and LLCs is called the alter ego theory. The alter ego theory is used when owners, shareholders, or a parent company forgo business formalities and only operate the entity as a “mere tool or business conduit.” When considering piercing the veil between individuals and the entity, Texas courts will look at how the owners and the company dealt with internal matters. Some important factors include the degree to which corporate and personal property are kept separate, the financial interest involved, and the control the individual has over the entity.
When a corporation or an LLC has failed to maintain business formalities or the entity was used for personal purposes, Texas courts will pierce the veil and impose personal liability on the owners or shareholders to prevent the use of the entity as a cloak for fraud or illegality or to correct an injustice. Another popular method of piercing the veil under alter ego theory is when the business fails to follow statutory requirements, sometimes even the simple act of missing an annual filing will open the doors to personal liability.
One of the most important considerations for courts seeking to pierce the veil in a tort case is whether the entity which is responsible for the injury is capable of paying a judgement, there is no reason to pierce the veil and seek redress against the owners. If the entity is undercapitalized, meaning that the business does not have enough capital to properly operate or pay the judgement, then the court is more willing to find a need to pierce the veil against the business owners.
The other theory used to pierce the veil is used exclusively in situations between multiple businesses is called the single business enterprise theory. This theory is used when businesses integrate their resources and operate as if their was one entity. It is not used to to impose liability on individuals but upon another business working in tandem with the owners and resources of the entity of liability. Texas courts have been reluctant to use the this theory and will typically consider factors that the entities had common employees, common offices, centralized accounting, co-mingled payment and receivables, and common shareholders or owners.
Reverse veil piercing, or when a creditor of the owner of an entity seeks collection against the shares or ownership interest, is another area of concern to business owners. In Texas, the TBOC provides that the only way for a creditor to satisfy a judgement against shares or ownership of a business is through a court charging order. The charging order does not transfer the interest or ownership in the business, but merely requires that the distributions or profits paid to those shares are to be paid to the creditor. The creditor will not have control or a vote in how the business operates. Texas law also prevents creditors of an owner from forcing a sale or transfer of entity assets. Charging orders are not easily granted by courts and can involve costly litigation to secure.
There are other important notes to consider when analyzing your business and personal liability. Often times you will be required to personally guarantee agreements for your business, including financing, franchise agreements, and other contracts. This personal guarantee is exactly that, a personal (and legally binding) promise that you will fulfill the contract or obligation should be business fail to do so. A business entity also will not insulate you from criminal liability.
Lastly, if your own personal act causes an injury to someone, you can still be personally liable. Persons are liable for their own personal actions. This is perhaps the best reason to secure personal liability insurance if you are actively involved in a high risk profession, i.e. doctors, lawyers, CPAs, etc.
Texas has one of the strongest business liability protections in the US. Coupled with business friendly courts and legislature, Texas is one of the best locations to start or expand your business today. Call Reidel Law Firm today to discuss your business liability issues, at (832)510-3292 or use the form below.