What Is Reverse Veil Piercing and How Should You Protect Against It?
By: Danielle Taylor, Attorney at Law (Thrash, Carroll & Vanway Law Group)
Normally, limited liability business entities, which include corporations and limited liability companies (LLCs), prevent the entity’s creditors from going after an owner’s personal assets to satisfy their claims. But in rare circumstances, courts allow piercing of the corporate veil. When this occurs, creditors who win a legal judgment against the corporation or LLC may target the personal assets of a shareholder or LLC member to satisfy the debt.
Reverse veil piercing also allows an exception to the legal separateness between corporate or LLC entities and their owners, but in the opposite direction. When the corporate veil is pierced—in reverse—business assets can be used to pay for obligations incurred by the owner.
Courts are hesitant to allow veil piercing or reverse veil piercing except in cases where there has been serious wrongdoing, such as fraud. Whether a court will permit reverse veil piercing is based on the specific facts of the case, as well as the law of the state where the LLC is formed or the corporation is incorporated.
When Reverse Veil Piercing May Be Permitted
In general, Texas courts consider several factors when deciding on the appropriateness of veil piercing or reverse veil piercing. Such factors include:
- Whether the company has been used to promote fraudulent, unjust, or illegal actions;
- Whether the company is the alter ego of its owner (A company is an alter ego when the owner and the business entity are separate only on paper, not in reality);
- Whether business and personal funds have been commingled (This factor is important for the alter ego factor, and in some cases, may be a determining factor for piercing the veil);
- Whether the company is sufficiently capitalized (Once a major factor, modern courts will consider capitalization as a mere factor but not an independent basis to pierce the veil);
- Where company formalities are observed (Like capitalization, formalities were once a major consideration. However, recent changes to Texas statutes have de-emphasized this factors);
Avoiding Reverse Veil Piercing
The best way to keep the legal barrier up between yourself and your company is to treat your company as a wholly separate entity from you, personally. Maintain accurate and meticulous records and avoid using your company to evade a personal obligation, carry out a fraud or crime, or obtain an unfair advantage. Courts in several states (including Texas) have found that when the personalities of the business entity and the individual are no longer separate and maintaining that separateness would result in an injustice, it is appropriate to pierce—and in some cases, reverse pierce—the corporate veil.
Seek the advice of an experienced business lawyer to avoid making your LLC or corporation vulnerable to claims for your personal debts and vice versa. If you are on the receiving end of a veil piercing or reverse veil piercing claim, a strong defense is crucial to protect your assets. Contact our business lawyers to schedule a consultation.