Pre-Incorporation Liability

Question 2

What is a corporate promoter?

Answer 2

A promoter acts on behalf of a corporation that is yet to be formed (usually assists in the planning and formation of the new business).

Question 3

A promoter is personally liable for…

Answer 3

…any contracts entered into on behalf of the corporation so long as both parties to the transaction know that the corporation has not yet been formed.

However, a promoter will NOT be held personally liable if:
1. There is a novation where the parties agree to release the promoter from liability in favor of holding the corporation solely liable; OR
2. The promoter is able to obtain indemnity from the corporation (usually requires that the promoter did not violate any fiduciary duties).

Question 4

A corporation is NOT bound by any pre-incorporation contracts that were…

Answer 4

…entered into by promoters UNLESS the corporation adopts such contracts.

Question 5

An adoption of pre-incorporation contracts entered into by promoters can be…

Answer 5

…express or implied from the actions of the corporation or its agents (e.g., accepting the benefits of a known pre-incorporation contract).