The reason you formed an LLC or a corporation was to put a wall between the business and everything you own personally. Most Texas business owners understand that in general terms. Far fewer can say where the wall actually stands, which is a problem, because the places it gives way are specific, and almost all of them are things an owner does rather than things that happen to the company.
Texas law on this is unusually clear by national standards. The state has a statute, not just a body of case law, and the statute is deliberately narrow. Understanding what it covers, and the handful of situations it does not reach, tells you most of what you need to know about protecting yourself.
The default rule: the entity owes the debt, not the owner
For a Texas limited liability company, the starting point is Section 101.114 of the Texas Business Organizations Code. It reads: “Except 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.”
Two things in that sentence deserve attention. The protection covers judgments, not just ordinary trade debt, so a plaintiff who wins against the company does not automatically get to collect from you. And the protection can be given away by your own company agreement. If the agreement specifically provides that a member is liable for something, that provision controls. This is one of several reasons that a company agreement drafted from an online template is not a neutral document.
For corporations, the parallel provision is Section 21.223. A holder of shares, a beneficial owner of shares, or a subscriber is not liable to the corporation or its obligees for the shares themselves beyond paying the full consideration owed, nor for any contractual obligation of the corporation on an alter ego theory, a fraud theory, or a similar doctrine, nor for corporate obligations on the basis of a failure to observe corporate formalities.
Section 101.002(a) of the same code then connects the two: “Subject to Section 101.114, Sections 21.223, 21.224, 21.225, and 21.226 apply to a limited liability company and the company’s members, owners, assignees, affiliates, and subscribers.” In other words, the corporate shareholder protections and the LLC member protections work together rather than in separate universes.
The narrow statutory exception for contract claims
Section 21.223(b) sets out the one path through the shield for a contractual obligation. The protection does not apply if the obligee 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 obligee primarily for that person’s direct personal benefit.
Count the elements, because a claimant has to prove all of them:
There must be actual fraud, not constructive fraud and not merely a broken promise. The company must have been used for the purpose of perpetrating it. The fraud must have been perpetrated, not merely attempted. It must have been committed against this particular obligee. And it must have been done primarily for the direct personal benefit of the individual, not simply for the benefit of the business.
That last element is the one that defeats most claims. An owner who makes an aggressive projection, or who keeps a struggling company trading past the point a cautious person would have stopped, is not thereby benefiting personally in the way the statute means. Money that moved from the company into the owner’s own pocket while the obligee was being deceived is a different matter.
Section 21.224 then makes the statutory standard the only standard: the liability of a holder, beneficial owner, subscriber or affiliate for an obligation limited by Section 21.223 “is exclusive and preempts any other liability imposed for that obligation under common law or otherwise.” A claimant cannot bypass the statute by pleading a common law alter ego theory instead.
Why “they ignored the formalities” is not enough
This is where Texas departs sharply from what many business owners have read online, and from how veil piercing works in some other states. Section 21.223(a)(3) expressly bars liability based on a failure to observe corporate formalities. No annual meeting. No written minutes. No formal resolution before a significant transaction. Under the Texas statute, none of that supports personal liability on a contract claim standing alone.
The same is true of the other factors a claimant often lists: the company was thinly capitalized, one family controlled everything, the owner was the only signatory on the account. Those facts may be true and may still be legally insufficient, because the statute asks for actual fraud for direct personal benefit and those facts are not that.
None of which is an argument for running a sloppy company. Formalities still matter for tax treatment, for proving what the company actually decided and when, for financing and for a future sale, and a company agreement that nobody follows creates disputes among the owners themselves. The point is narrower: formalities are not the thing standing between your house and a company creditor. The statute is.
Your own conduct is a separate question entirely
Here is the exposure most owners misunderstand. The entity shield protects you from the company’s obligations. It does not protect you from your own.
The Supreme Court of Texas addressed this directly in Keyes v. Weller, No. 22-1085, decided June 28, 2024. The court held that “Section 21.223 does not limit an individual’s liability under the common law for tortious acts allegedly committed while acting as a corporate officer or agent, even when the individual is also a shareholder or member.” It added that the undisputed fact that the defendants made the alleged misrepresentations in their corporate capacity “does not insulate them from liability under the common law.”
Read practically, that means the following. If you personally make a misrepresentation during a negotiation, you can be sued for it in your own name, and the fact that you were wearing the company’s hat at the time is not a defense. The same logic reaches other torts an individual commits: fraudulent inducement, conversion, misappropriation of trade secrets, tortious interference. The company may also be liable. That does not subtract from your own exposure, it adds to it.
This is why the question “can they pierce the veil” is often the wrong question. In a large share of cases where an owner ends up personally on the hook, nobody pierced anything. The owner was sued directly for what the owner did.
The guaranty you signed and forgot about
The single most common route to personal liability in Texas has nothing to do with statutes or doctrines. You agreed to it.
Personal guaranties appear routinely in commercial leases, equipment financing, lines of credit, SBA loans, vendor credit applications and supplier terms. They are often one paragraph in a longer document, sometimes on a separate signature page, and they frequently survive the transaction that produced them. A guaranty signed in 2019 to open a trade account can still be live in 2026 against a much larger balance.
Two habits are worth building. Before you sign anything on behalf of the company, check whether the signature block identifies you by name and title as signing for the entity, or whether it also asks for your signature individually. And keep a list of every guaranty the company’s owners have outstanding, with the counterparty, the date and whether it is capped. Most owners cannot produce that list on request, which means they do not actually know their exposure.
Franchise tax forfeiture
There is one more exposure that is easy to trigger by inattention. Under Section 171.251 of the Texas Tax Code, the comptroller forfeits a corporation’s corporate privileges if it fails to file a required franchise tax report within 45 days after notice of forfeiture is sent, fails to pay the tax or a related penalty within that period, or refuses to let the comptroller examine its records.
Section 171.255(a) then provides that if corporate privileges are forfeited for failure to file a report or pay a tax or penalty, “each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived.” Subsection (b) sets that liability “in the same manner and to the same extent as if the director or officer were a partner and the corporation were a partnership.”
Subsection (c) provides a defense for a debt created over the director’s objection, or without the director’s knowledge where reasonable diligence in becoming acquainted with the affairs of the corporation would not have revealed the intention to create the debt. Subsection (d) adds a detail worth noticing: reviving the charter and the corporate privileges later does not undo liability that already attached.
The practical takeaway is unglamorous. A missed franchise tax filing is not a paperwork problem that stays contained in the accounting file. Confirm your filing status with the comptroller rather than assuming it is handled.
What is not settled
Two points deserve honest labeling rather than a confident answer.
The first is the reach of Section 171.255 to limited liability companies. The statute speaks in terms of a “corporation” and of “director or officer,” while Chapter 171 defines the entities subject to the franchise tax far more broadly. Whether, and how, the provision applies to LLC managers and members has been litigated and should not be treated as resolved. If your entity is an LLC and its franchise tax filings have lapsed, the right response is to fix the filings, not to rely on an argument about statutory scope.
The second is the boundary of Section 21.223 itself. The statute addresses contractual obligations of the entity. Keyes v. Weller confirms that it does not limit common law liability for an individual’s own tortious acts. Exactly where the preemption in Section 21.224 ends, and which theories fall inside or outside the statute in a given fact pattern, continues to be worked out case by case. Anyone who tells you the line is bright is overstating it.
What to actually do
Four things, in order of how much exposure they close per hour spent.
Pull every personal guaranty the owners have signed and build the list described above. Confirm the company’s franchise tax filings are current with the comptroller. Read your company agreement for any provision that assigns liability to a member, since Section 101.114 lets the agreement override the default. And make sure that everyone authorized to negotiate on the company’s behalf understands that what they say personally during a deal can follow them personally afterward.
Those four steps address the routes that actually produce personal liability for Texas business owners. Annual meeting minutes, for all their other uses, do not.
You can read more about entity formation, governance and the documents that govern owner liability on our business law practice area page.
Related reading
- LLC vs. S-Corp in Texas: Which Structure Is Right for Your Business?
- What Should Be in a Texas LLC Company Agreement?
- What Every North Texas Business Owner Should Have in a Legal File
About the author: John M. Hafen is a partner at Hanshaw Kennedy Hafen in Frisco, Texas. He focuses on complex commercial litigation and serves as outside counsel to companies across North Texas.