De Facto Corporation and Corporation by Estoppel

Question 1

What is a De Facto Corporation?

Answer 1

The proprietors failed to form a de jure corporation, so they will be personally liable for what the business does (because it’s just a partnership). Under these doctrines, the business is treated as a corporation, so shareholders are not liable for what the business did. Anyone asserting either doctrine must be unaware of failure to form de jure corporation.

Question 2

What are the requirements that must be met for a corp. to be a de facto corp?

Answer 2

1. There is a relevant incorporation statute (there is!).
2. The parties made a good faith, colorable attempt to comply with it. And
3. Some exercise of corporate privileges (acting like we have a corporation).
   * Note: If the doctrine applies, the business is treated as a corporation for all purposes except in an action by the state. (Such an action would be quo warranto).

Question 3

Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract?

Answer 3

Yes - unless the court applies De Facto Corporation, here it seems there is a good argument for that, look at the facts

Question 4

What is corporation by estoppel?

Answer 4

One who treats a business as a corporation may be estopped from denying that it is a corporation
EXAMPLE - You do business with people who hold their business out as a corporation. They think it’s a corporation. You think it’s a corporation. You write checks to the “corporation” and deal with it as a corporation. Turns out it’s not a corporation. You sue the proprietors individually. Under this doctrine, you cannot win. You are estopped to deny that the business was a corporation.
-Only applies in contract cases and not tort claims this narrower than De Facto Corporation)

Question 5

Where are the doctrines of the De Facto Corporation and Corporation by Estoppel practiced?

Answer 5

Abolished in many states - Always throw this in, not a majority, but almost, if it is alive here is how it works