Concepts for Corporations and LLCs

Question 1

Promoter’s liability

Answer 1

Promoters are liable for all transactions they sign in their own name or on behalf of the company that does not yet exist unless (1) the parties agree to only hold the future entity liable, or (2) there is a novation (i.e., where all parties agree to substitute one party for another)

Question 2

Adoption (Preorganization Ks)

Answer 2

If an entity adopts the preorganization transaction, it becomes liable under that K, but adoption on its own does not limit promoter’s liability

Question 3

Fiduciary duties (before formation of a corporation or LLC)

Answer 3

Promoters owe a duty of loyalty and care to (1) their copromoters, (2) the to-be-formed entity, and (3) the investors in the to-be-formed entity

Question 4

Duty of loyalty

Answer 4

Requires the promoter to put the interests of (1) their copromoters, (2) the to-be-formed entity, and (3) the investors in the to-be-formed entity groups ahead of the promoter’s own

Question 5

Duty of care

Answer 5

Requires due care when acting on behalf of the to-be-formed entity

Question 6

Subscription agreements

Answer 6

In many states, offers to purchase shares from the corporation in exchange for a capital contribution must be in writing and are irrevocable for some specific time period unless stated otherwise.

If the investor fails to make the capital contribution, the corporation may sue the investor for breach of K

Question 7

De facto corporations/De facto LLCs

Answer 7

Protects signatories from being personally liable on any corporate Ks with third parties, even if the corporation was defectively formed, if the incorporators:

1. Proceeded in good faith (i.e., an honest and reasonable belief that a corporation was formed)
2. Under a valid incorporation statute
3. For an authorized purpose
4. Executed and acknowledge articles of incorporation pursuant to that purpose