Formation Flashcards
Who are promoters?
Engages in activities, such as procuring capital and entering into contracts, to bring the corporation into existence as a business entity.
Owes fiduciary duty to corporation.
A promoter is personally liable for knowingly acting on behalf of a corporation before incorporation and is jointly and severally liable for all liabilities created while so acting, even after the corporation comes into existence, unless a subsequent novation releases the promoter from liability.
If a party who contracts with a promoter knows that the corporation has not yet been formed and agrees to look only to the corporation for performance, then the promoter is not liable.
Although a promoter can seek compensation for pre-incorporation activities undertaken on the corporation’s behalf and reimbursement for related expenses, the promoter cannot compel the corporation to make such payments, because the promoter’s acts, although done to benefit the corporation, are not undertaken at the corporation’s direction.
What is a corporation’s liability for pre-incorporation transactions?
General Rule: No liability.
Exception: Liable when the corporation adopts the contract. Adoption takes place when the corporation accepts the benefits of the transaction or gives an express acceptance of liability for the debt, such as through board resolution after incorporation.
Who is an incorporator and are they liable?
An incorporator is a person who signs and files the articles of incorporation with the state.
Not liable for a contract entered into by a promoter of the corporation.
What are articles of incorporation?
Must be filed with State.
Must include;
- Corporate name (including “company”, “inc”, “lmtd.” etc.)
- Purpose (broad is ok)
- –Shareholders or State or corporation can sue if acts outside purpose (against director if corproation)
- Agent of the corporation (name and address)
- The names and addresses of incorporators
- Duration (assumed indefinitely if not)
- Authorized shares
May Include:
- Powers (may enumerate powers that the corporation possesses. Most states automatically grant all corporations broad powers),
What is the timing of incorproation?
Some states treat the corporation as having been formed as of the date of the filing, while other states consider the corporation a legal entity only when the state has accepted the articles of incorporation
What is a defective (de facto) corporation?
Lack of Good Faith
- When a person conducts business as a corporation without attempting to comply with the statutory incorporation requirements, that person is liable for any obligations incurred in the name of the nonexistent corporation.
With Good-Faith: Corporation still treated has a corporation if made good-faith effort to comply with incorporation process and hd no actual knowledge of a defect in the corporate status.
Note: A person who deals with an entity as if it were a corporation is estopped from denying its existence and is thereby prevented from seeking the personal liability of the business owner. This doctrine is limited to contractual agreements
Note: when a corporation has not been created, the entity may be treated as a general partnership. A partnership is an association of two or more persons to carry on a for-profit business as co-owners. In a general partnership, each partner is jointly and severally liable for all partnership obligations.
What are bylaws?
No obligation to file them.
Set forth day-to-day rules.
If by-laws and articles conflict, who wins?
Articles
