Piercing the corporate veil in Texas — alter ego is not enough on a contract

Veil piercing is not a cause of action. It is a remedy — a way of making someone else answer for a judgment against a company — and it is pleaded alongside the claim that produces the judgment.

Texas has narrowed it more than most states, and the narrowing runs in one direction only. Business Organizations Code § 21.223 governs contractual obligations and demands actual fraud. It leaves tort claims alone, where common-law standards still apply and an agent remains personally liable for their own conduct.

Secondary sources conflate the two constantly. The distinction is the whole subject.

What the claim is

A company owes you money and has none. You want to reach its owner, its parent, or an affiliated entity — or you want to hold an employer responsible for what its employee did.

Where the right comes from

Common law, as limited by BOC § 21.223 for corporations and extended to limited liability companies by § 101.002. Vicarious liability comes from the common law of agency.

The contract rule — § 21.223

Section 21.223(a) bars holding a shareholder, a beneficial owner, a subscriber, or any affiliate liable to the corporation or its obligees with respect to:

• (a)(2) any contractual obligation of the corporation, or any matter relating to or arising from the obligation, "on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory"; and
• (a)(3) any obligation of the corporation on the basis of a failure to observe corporate formalities, including failures to comply with the code, the certificate of formation or the bylaws.

Read subdivision (3) carefully. The formalities shield is not limited to contracts — it covers "any obligation." No meetings, no minutes, no resolutions: none of it is a route to personal liability in Texas.

The single exception, § 21.223(b): subsection (a)(2) does not limit liability if the obligee demonstrates that the owner "caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit" of the owner.

Every phrase of that sentence is a hurdle. Actual fraud, not constructive. Perpetrated on the obligee, not on the world. Primarily for the direct personal benefit of the owner — a benefit that ran to the company is not enough.

Section 21.224 makes the limitation exclusive and preempts any other theory of liability for the same obligation. Section 21.225 preserves liability where the person expressly assumed or guaranteed the obligation, or is liable under another statute.

Section 101.002 applies all of this to LLCs, members and managers.

The tort rule — what § 21.223 does not touch

The statute limits liability for contractual obligations. It does not address tort claims, and for those the common-law standards survive:

• Alter ego — such unity between the owner and the corporation that separateness has ceased, and holding only the corporation liable would work an injustice;
• Sham to perpetrate a fraud;
• Illegal purpose.

Alongside that runs a rule that has nothing to do with piercing at all: a corporate agent is personally liable for their own tortious conduct, whether or not the company is also liable. The officer who made the misrepresentation, the manager who committed the assault, the employee who caused the wreck is a defendant in their own right. No veil needs piercing to reach them.

Vicarious liability — the reverse direction

Veil piercing reaches from the company up to its owner. Respondeat superior reaches from the employee across to the employer.

An employer is liable for an employee's tort committed within the course and scope of employment — conduct within the general authority given, in furtherance of the employer's business, and to accomplish the object for which the employee was hired.

Two limits matter. An independent contractor's conduct is generally not attributed to the hiring party. And conduct outside the scope — the frolic, the personal errand, the assault for personal reasons — is not either.

Where vicarious liability fails, the direct claims remain: negligent hiring, supervision and retention, which fault the employer for its own conduct rather than the employee's.

What a plaintiff has to prove

On a contract debt:

1. The corporation is liable on the obligation;
2. The defendant is a holder, beneficial owner, subscriber, or affiliate; and
3. That person caused the corporation to be used for the purpose of perpetrating, and did perpetrate, an actual fraud on the obligee, primarily for their own direct personal benefit.

On a tort:

1. The corporation is liable in tort;
2. Unity of interest and ownership such that separateness has ceased; and
3. Adherence to the fiction would promote injustice.

Vicariously:

1. An employment relationship;
2. A tort by the employee; and
3. Conduct within the course and scope of employment.

How long you have to file

Whatever period governs the underlying claim. Piercing is a remedy, and it carries no deadline of its own — four years for a contract or fraud claim under CPRC § 16.004, two years for most torts under CPRC § 16.003(a).

Piercing can also be raised after judgment, in a proceeding to reach the assets of a person alleged to be responsible for it.

What has to happen before you file

Nothing. As a practical matter, the theory is pleaded with the underlying claim, because the facts that support it — the commingled accounts, the transfers to the owner, the timing of the distributions — come out in discovery on the main case.

What the claim pays

Nothing on its own. Piercing adds a defendant who can be made to satisfy the judgment on the underlying claim. The measure of damages is the underlying claim's.

Attorney's fees follow the underlying claim as well — available if it carries them, not otherwise.

Evidence that matters

Because the statute has removed formalities and undercapitalisation from the contract analysis, the useful evidence is about money moving to the owner:

• distributions or transfers to the owner while creditors went unpaid;
• personal expenses paid by the company;
• commingled bank accounts;
• assets moved to a new entity leaving the debts behind — which is also a fraudulent transfer;
• representations about the company's finances made to induce the contract, which is where the "actual fraud on the obligee" element gets proved.

Common defenses

• No actual fraud, which defeats the contract claim however thoroughly the formalities were ignored.
• No direct personal benefit, or a benefit that ran to the company.
• Section 21.223(a)(3) — failure to observe formalities is not a basis for liability.
• Section 21.224 preemption, barring alternative theories for the same obligation.
• The conduct was outside the scope of employment, on a vicarious claim.
• Independent contractor status.
• Limitations, on the underlying claim.

What people get wrong

Alter ego alone does not pierce a contract debt. Section 21.223(a)(2) names alter ego and rules it out. The obligee needs actual fraud for the owner's direct personal benefit.

Ignoring formalities changes nothing. Subdivision (a)(3) forecloses it for any obligation.

Undercapitalisation is not the argument it used to be. Standing alone it does not satisfy § 21.223(b).

The statute does not protect owners from their own torts or their own fraud. It limits liability for the corporation's contractual obligations. A person who commits a tort is liable for it personally.

A personal guaranty makes the whole question academic. Section 21.225 preserves liability where the owner guaranteed the debt, which is why lenders ask for one.

Where it came from

Texas veil-piercing law changed course in 1986, when the Texas Supreme Court allowed a contract creditor to reach a shareholder on an alter ego theory without proof of fraud. The legislature responded, and kept responding — narrowing the doctrine session by session until § 21.223 reached its present form, in which alter ego, constructive fraud, sham, and disregarded formalities are all named and all excluded.

The policy behind it is that a contract creditor chose its counterparty. It could have investigated the company, demanded a guaranty, taken security, or priced the risk. A tort victim chose nothing, which is why the statute leaves tort claims where the common law had them.

That distinction explains the shape of Texas law here better than any list of factors: the veil is close to solid against a contract claim, and considerably thinner against a tort.

Common questions

Can I sue the owner personally for a company's unpaid contract?

Only by proving the owner caused the company to be used to perpetrate an actual fraud on you, primarily for the owner's direct personal benefit.

Does it matter that the company never held meetings or kept minutes?

No. Section 21.223(a)(3) says failure to observe corporate formalities is not a basis for liability for any obligation.

Is the rule different for a tort claim?

Yes. Section 21.223 addresses contractual obligations. Common-law piercing standards still apply to tort claims, and a person is always personally liable for their own tortious conduct.

Does this apply to LLCs?

Yes. Business Organizations Code § 101.002 extends § 21.223 to LLCs, their members and managers.

Can I hold an employer responsible for its employee's car wreck?

Yes, if the employee was acting within the course and scope of employment. If not, look at negligent hiring, supervision or retention.

What is the deadline?

The deadline of the underlying claim. Piercing is a remedy, not a separate cause of action.

Where these rules live

• CPRC § 16.003 — Two-year limitations period
• CPRC § 16.004 — Four-year limitations period
• CPRC § 16.051 — Residual four-year limitations period
• CPRC § 38.001 — Recovery of attorney's fees
• CPRC § 33.011 — Definitions for proportionate responsibility
• CPRC § 41.003 — Standards for recovery of exemplary damages