Tax Law and Business Organization Strategy

Texas Supremes Overturn Single Business Enterprise Theory

Our previous detailed discussion of Piercing the Corporate Veil notes that this theory has been followed by Texas courts. The Texas Supreme Court recently ruled that it would not follow this theory and that the theory had no place in Texas corporate law. (SSP Partners, et al. v. Gladstrong Investments (USA) Corporation, Inc., No. 05-0721, November 14, 2008.) Therefore, the more traditional tests regarding piercing the corporate veil now hold sway in Texas.

The Single Business Enterprise Theory provided that one corporation could be held liable for the debts of another corporation whenever the two corporations coordinate operations and combine resources in pursuit of the same business purpose. The Court noted that this theory has never been approved by the Court and the Court had prevously pointed out that an issue exists whether the theory is a necessary addition to Texas law. The Court notes: 

Creation of affiliated corporations to limit liability while pursuing common goals lies firmly within the law and is commonplace. We have never held corporations liable for each other’s obligations merely because of centralized control, mutual purposes, and shared finances. There must also be evidence of abuse, or as we said in Castleberry, injustice and inequity. By “injustice” and “inequity” we do not mean a subjective perception of unfairness by an individual judge or juror; rather, these words are used in Castleberry as shorthand references for the kinds of abuse, specifically identified, that the corporate structure should not shield — fraud, evasion of existing obligations, circumvention of statutes, monopolization, criminal conduct, and the like. Such abuse is necessary before disregarding the existence of a corporation as a separate entity. Any other rule would seriously compromise what we have called a “bedrock principle of corporate law”55 — that a legitimate purpose for forming a corporation is to limit individual liability for the corporation’s obligations.


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