Your LLC is not a force field: myths about personal liability protection in Texas

Generally yes for company debts, but not in every situation

A properly formed and maintained Texas LLC generally protects its owners from personal liability for the company's debts. The Texas Business Organizations Code provides that, except to the extent the company agreement specifically says otherwise, a member or manager is not liable for a debt, obligation or liability of the LLC, including a court judgment against it. That is a strong default.

But the protection covers the company's obligations, not yours. It does not reach debts you personally guaranteed, contracts you signed in your own name, or harm you cause through your own conduct, and it can be weakened by how the company is run and whether its state filings are current. My approach is straight talk counsel, so this guide walks through the myths I hear most often from Texas owners. It is general information, not legal advice; talk to a licensed Texas attorney about your own situation.

Myth: once I form an LLC, nothing I own is at risk

The LLC separates the company's obligations from the owners' obligations. It does not make you immune from your own. If you personally injure someone, make a misrepresentation, or commit a wrong in the course of the business, the claim may run against you as well as the company. The entity shields you from being liable merely because you are an owner; it is not a shield for what you yourself do.

Licensed professionals should be especially clear on this. Forming a professional LLC or professional corporation organizes the practice, but it does not erase a professional's responsibility for their own work. Professional liability insurance and careful practice are what address that risk.

Myth: a personal guarantee does not matter because I have an LLC

This is the most common hole in an owner's protection, and it is entirely voluntary. Banks, landlords, equipment lessors and many suppliers ask owners of small companies to sign a personal guarantee. When you sign one, you have agreed to pay the company's debt yourself if the company does not. The LLC does nothing to protect you from a promise you made personally.

Spouses deserve a mention here too. Some lenders ask an owner's spouse to sign a guarantee as well, which can extend the exposure to assets the owner assumed were out of reach. Before anyone in the household signs, understand exactly what the document covers, whether it has a limit, and how it ends.

Guarantees are often a normal part of getting credit for a young business, and sometimes there is no way around them. What you can do is read them, understand whether they are limited or unlimited, ask whether they can be capped or released as the company builds a track record, and keep a list of every one you have signed. If you are about to take on bank credit, the guide on when a line of credit beats a loan is a useful primer on how lenders look at a growing company.

Myth: if I skip formalities, the protection disappears automatically

Texas law is more protective here than many owners expect. Section 21.223 of the Business Organizations Code, which section 101.002 applies to LLCs, says owners may not be held liable for the company's obligations simply because the company failed to observe formalities, and it limits holding owners liable for the company's contractual obligations on alter ego or similar theories unless the owner caused the company to be used to perpetrate an actual fraud primarily for the owner's direct personal benefit.

That does not mean records are optional. Good records prove what the company agreed to, who owns it, and that its money was kept separate. Mixing personal and company funds, paying personal bills from the company account, or treating company assets as your own can support the kinds of claims the statute still allows and makes any dispute harder to defend. And lenders, buyers and courts will ask for your documents regardless. Formality is cheap insurance.

Myth: the protection lasts forever once the company is formed

Protection depends on keeping the company in good standing. The Texas Comptroller explains that an entity that fails to file its franchise tax report or its Public Information Report may forfeit its right to transact business in Texas, even if it owes no tax. Forfeiture denies the entity the right to sue or defend in Texas courts, and each officer, director, partner, member or owner becomes personally liable for certain debts of the entity.

That is a striking consequence for a missed form. It is also one of the easiest risks to prevent. My guide on the yearly upkeep that keeps a Texas company in good standing lists the filings and habits that matter, and I recommend every owner put the annual deadline on a calendar the day the company is formed.

Myth: if the contract has my signature, the company is the one bound

How you sign matters. A contract signed by you individually, without the company's name and your title, can be read as your personal obligation. The same is true of invoices, leases and purchase orders that name you rather than the company. Owners who started as sole proprietors and later formed an LLC are especially prone to this, because their old habits and old contracts carry over.

Make it a rule that the company's full legal name appears as the party to every contract, and that you sign with your title, such as manager or member. When you form a new company to take over an existing business, review the existing contracts, leases and accounts, and assign or replace them so they belong to the company. If you formed the company yourself, my guide on filing your own Texas LLC has a checklist of first steps that includes this.

Myth: one company can safely hold the business and everything it uses

The LLC protects owners from the company's debts. It does not protect the company's own assets from the company's debts. If one LLC runs a risky operation and also owns the building, the vehicles and the cash reserves, a large claim against the operation can reach all of it, because it all belongs to the same entity.

For that reason, some owners hold real estate or other valuable assets in a separate entity that leases them to the operating company, and Texas also offers the series LLC, which can hold separate assets or business lines in distinct series. These structures can make sense, but they only work if they are set up properly, documented, and actually run as separate. A second company that shares a bank account with the first, or that nobody remembers to keep in good standing, adds cost without adding protection.

Whether a multi-entity structure is worth it depends on the risk in the business, the value of the assets and the owners' tolerance for extra paperwork. It is a conversation to have with your attorney and CPA together, and for many Dallas owners with a building or significant equipment, it is worth having before the next expansion rather than after a claim.

Myth: an LLC means I do not need insurance

An LLC protects owners from some of the company's liabilities. It does not pay claims. If the company is sued and loses, the company's own assets are on the line, and a judgment can end a business even when the owners' homes are safe. Insurance is what protects the company itself.

Talk to a property and casualty agent such as Aaron Husman about general liability, property and other coverage that fits your operations, and to your attorney about contract terms such as indemnification clauses and warranties that shift risk between you and your customers or vendors. The entity, the contracts and the insurance work together; none of them does the job alone.

What I check when an owner asks how protected they really are

When an owner asks me this question, I review the documents and the habits together, because protection depends on both. The list below is the core of that review, and you can run most of it yourself as a starting point.

If you answer no or not sure to any of these, that is your starting list. None of them requires a lawsuit to fix, and most can be addressed in an afternoon with the right documents in front of you.

• Is the company's state standing current, with franchise tax and information reports filed?
• Does a signed company agreement exist, and does it say anything about member liability?
• Which personal guarantees has each owner signed, and are any still needed?
• Are contracts, leases and accounts in the company's name, signed with a title?
• Is company money kept in company accounts, with no personal expenses paid from them?
• Is the company adequately insured for its operations?
• Are major decisions documented by consents or minutes?

Putting the pieces back together if some are missing

If this review turns up gaps, the fix is usually straightforward when it is done before a claim arrives. A missing company agreement can be drafted and signed. Lapsed state filings can often be brought current. Contracts can be reassigned. Accounts can be separated going forward. What cannot be fixed easily is a gap discovered in the middle of a lawsuit, when the other side is already looking for it.

I advise owners in Dallas and across the area on exactly this kind of cleanup, and I handle the disputes that arise when it was never done, so I see both ends. My goal is that you understand your own documents well enough to govern your company without creating personal liability. If you would like a review, send me your formation documents, agreement and any guarantees you have signed, and I will tell you plainly where you stand and what I would fix first.

Questions people ask me