Veil Piercing in Texas
Piercing the corporate veil is what a court does when it sets aside an LLC's or corporation's separate legal existence and holds an owner personally liable for the company's own obligation. Owners tend to picture this as a flexible, judge-made test — commingled bank accounts, thin capitalization, skipped paperwork — that a plaintiff's lawyer can argue into with the right set of facts. In Texas, that's not how it works anymore. The legislature took the doctrine out of the courts' hands for a company's contractual obligations and wrote a narrow, specific standard into the Business Organizations Code instead.
There's also a reverse version of the same question: instead of a company's creditor reaching an owner's personal assets, a creditor of the owner tries to reach the company's assets to satisfy a debt that has nothing to do with the business. Texas answers that one by statute too, and just as narrowly — for a Texas LLC, the answer is largely settled before a lawsuit is ever filed, without needing a court to invent a doctrine at all.
The Texas Standard — Business Organizations Code Section 21.223
Section 21.223(a)(2) says an owner, member, or subscriber of a corporation — and, through a separate section described below, an LLC — can't be held liable for the company's contractual obligations on the theory that the owner is or was the company's "alter ego," or on a theory of actual or constructive fraud, a sham to perpetrate a fraud, or any other similar theory. Section 21.223(a)(3) goes further and covers any obligation of the company, not just a contract claim: an owner isn't liable just because the company failed to observe a corporate formality — missed a bylaw requirement, skipped a required vote, or otherwise didn't run itself exactly the way its certificate of formation or the Business Organizations Code says it should.
That leaves one door open, and Section 21.223(b) is narrow about it: the alter-ego and fraud-theory shield in (a)(2) doesn't protect an owner if the party trying to collect proves the owner caused the company to be used to perpetrate — and did perpetrate — an actual fraud on that party, primarily for the owner's own direct personal benefit. Both halves matter. The fraud has to be actual, not the constructive or theoretical version the same subsection otherwise rules out, and it has to be run primarily for the owner's own benefit, not just some benefit to the company generally. Section 21.223(a)(3)'s formalities protection has no matching fraud carve-out written into it at all — skipped formalities alone don't create liability, for any obligation the statute covers, fraud or no fraud.
Section 21.224 closes the loop: whatever protection Section 21.223 gives on a given obligation is exclusive, and it preempts any broader liability a court might otherwise import from the common law for that same obligation. There's no judge-made alter-ego doctrine sitting on top of the statute in Texas, waiting to catch what the statute lets through — the statute is the doctrine. Section 21.225 keeps two doors open on purpose: an owner who personally guarantees or expressly assumes a company obligation is still liable on the guarantee, and an owner who's independently liable under some other statute stays liable under that statute. Section 21.223 only protects against being drawn into liability through the entity itself — not against liability someone signed up for directly. Section 21.226 rounds it out on the other side: a pledgee holding shares as collateral, or an executor, trustee, or other administrator holding them in that capacity, isn't personally liable as a shareholder just because the shares or the interest pass through their hands.
Why the Same Rule Covers LLC Owners, Not Just Shareholders
Section 21.223 is written for corporations and shareholders, but Section 101.002(a) — subject to Section 101.114 — applies Sections 21.223 through 21.226 to a limited liability company and its members, owners, assignees, and affiliates just the same. Section 101.002(b) maps the vocabulary across: a membership interest counts as "shares," a member or assignee counts as a "holder" or "owner," the LLC itself counts as the "corporation," and the company agreement counts as "bylaws." Practically, that means an LLC member gets exactly the same actual-fraud standard a shareholder gets — choosing an LLC over a corporation doesn't weaken this particular protection at all.
Section 101.114 is the more familiar baseline underneath all of this: except as the company agreement specifically provides otherwise, a member or manager simply isn't liable for a debt, obligation, or liability of the LLC in the first place, including one arising under a court judgment. Section 21.223 answers the follow-up question — the narrow set of circumstances where a court can still get past that baseline shield to the member personally. For what the baseline shield itself does and doesn't cover day to day, see our LLC Asset Protection page.
The Multi-Factor Test Texas Replaced
This is a meaningfully different rule than the flexible, multi-factor test still used in a lot of states — the one that treats thin capitalization, commingled finances, missing corporate records, and ignored formalities as a totality-of-the-circumstances checklist a court can weigh however the facts point. Texas leaned on a version of that test too, before the legislature replaced it for a company's contractual obligations with the narrow standard above. Those same facts — undercapitalization, sloppy books, an unsigned operating agreement — aren't nothing, but standing alone they don't get a plaintiff past Section 21.223(a) anymore. Only actual fraud, run primarily for the owner's own direct benefit, does that.
That matters most for the owner who's genuinely informal rather than dishonest — the small operator who never got around to a signed operating agreement, or who paid a personal expense from the company account once and paid it back. Under a pure multi-factor test, that owner is exposed to an argument built entirely out of sloppiness. Under Section 21.223, sloppiness alone isn't the argument; a plaintiff still has to prove actual fraud aimed at them specifically, run for the owner's own benefit.
Reverse Piercing — Reaching the Company for the Owner's Own Debt
Run the question the other direction — a creditor holding a personal judgment against an LLC member, trying to reach the LLC's own assets or force a sale of the member's stake, for a debt that has nothing to do with the company — and Texas doesn't need a reverse-piercing doctrine to answer it, because Business Organizations Code Section 101.112 already closed that path directly. A charging order is the judgment creditor's exclusive remedy against a member's interest; the resulting lien can't be foreclosed under this code or any other law; and the creditor has no right to reach the LLC's own property or exercise any legal or equitable remedy against it. The rule applies the same way whether the LLC has one member or many. A properly maintained Texas LLC's own assets simply aren't reachable that way, by statute, regardless of how sympathetic the creditor's underlying claim is. Our Texas Charging Order page walks through Section 101.112 in full, subsection by subsection.
Alter Ego and a Self-Settled Trust — Not a Texas Question
The version of this question that comes up most often in asset-protection planning isn't about an LLC at all — it's whether a creditor can use an alter-ego or reverse-piercing theory to reach the assets inside a self-settled asset protection trust, one where the person who funded the trust is also the person it protects. That question doesn't arise under Texas law, because Texas doesn't recognize that kind of trust in the first place. Property Code Section 112.035(d) lets a settlor's own creditors reach the settlor's own beneficial interest in a trust regardless of any spendthrift language protecting that interest, whenever the settlor is also a beneficiary — which means there's no Texas self-settled trust for an alter-ego or reverse-piercing theory to reach to begin with. See our Does Texas Allow Asset Protection Trusts? page for the statute in full.
A Texas resident who specifically wants a self-settled asset protection trust has to set one up under another state's law, and Wyoming is among the states that allow it. Alter-ego and reverse-piercing exposure for a trust like that is governed by whichever state's law the trust is built under, not by Texas law — a different question, with a different answer, from anything else on this page. See our Wyoming Asset Protection Trust page for what that structure requires and what protects it.
Keeping the Shield Intact
None of the above is a reason to get informal about how the company is run. Section 21.223 sets the legal floor a court has to clear before piercing the veil — it doesn't make sloppy recordkeeping or commingled funds a good idea, and evidence of either one is exactly what a plaintiff points to when arguing that whatever happened was actual fraud rather than an honest business decision that went wrong. A signed operating agreement, a company bank account that stays separate from personal funds, and contracts signed in the LLC's name are what make the difference between a fact pattern a court dismisses in a page and one that goes to a jury.
Section 21.223 protects an owner from being personally blamed for the company's failures. It was never a substitute for the company actually working — see our Single-Member LLC Asset Protection page for how this exact standard plays out for a one-owner LLC, and our LLC Asset Protection page for the rest of what keeps a Texas LLC's liability shield intact.