Protecting your personal assets from your creditors is one of the major advantages of establishing a limited liability company. Unique to corporations, this personal liability protection does not extend to other business models, such as sole proprietorships or general partnerships.
Sometimes, courts allow creditors to pierce the corporate veil. That is, they permit creditors to set aside liability protections and go after the LLC’s assets as well as your personal assets. According to Professor Elizabeth Miller at Baylor Law School, courts often pierce the corporate veil when one or more of the following is true.
Undercapitalization
Your LLC should have enough capitalization to carry out its normal business functions. This is not the same as losing money as a business, as that happens all the time. Still, if your LLC does not have sufficient capital to satisfy reasonably knowable business expenses, a court may choose to pierce its corporate veil.
Personal purpose
Occasionally, there is no meaningful distinction between an LLC and its owner. If you commingle personal and business assets, a court may decide your LLC is just another version of you. This type of determination may put your personal assets at risk.
Lack of formalities
LLCs do not have as many legal formalities as more complex business models, such as corporations. Still, if you fail to do what is legally necessary to establish and maintain your LLC, a court may not give you liability protection from your creditors.
Generally, courts in Texas and across the country do not like inequitable results. Ultimately, if one or more of the above factors are present, a court is not likely to put you in a better position than your LLC’s creditors.