Texas Legislature Expands Scope of Liability for LLCs

Chris Hanslik

October 21, 2011

During the 2011 Texas Legislative Session several amendments to the Texas Business Organizations Code (TBOC) were passed. One of the more significant changes relates to the personal liability of members and managers of limited liability companies.

Section 101.114 of the TBOC provides that a member or manager is not liable for the debts, obligations or liabilities of a limited liability company, except as and to the extent the company agreement or regulations specifically provide otherwise. As stated, this language prohibits a court from holding the members or managers liable for the debts, obligations and liabilities of the limited liability company. Courts in Texas, however, have applied corporate veil piercing principles – alter ego, sham corporation, perpetrating an actual fraud – to limited liability companies, creating a conflict between the limited liability company statutes and common law. Applying the corporate veil piercing standards to limited liability companies these courts followed the provisions in Article 2.21 of the Texas Business Corporations Act which is now found in the TBOC in Sections 21.223 – 21.226.

In an effort to harmonize the TBOC with the state and federal courts that have addressed this issue, the Texas Legislature adopted the same standards used in the corporate statutory provisions. This amendment can be found in Section 101.002 of the TBOC which provides that Sections 21.223, 21.224, 21.225 and 21.226 apply to a limited liability company and its members, owners, assignees and subscribers, subject to the limitations contained in Section 101.114.

The result is that member and managers of Texas LLCs can no longer hide behind what was once thought of as an impenetrable liability shield.