Promoters and Incorporation

Question 1

What is a promoter?

Answer 1

Somebody who persuades people to invest in a corporation they intend to form.

Question 2

When is a promoter personally liable?

Answer 2

Always, UNLESS

1. the contract expressly waives them from liability OR
2. a novation has occurred.

Question 3

What is a novation?

Answer 3

An agreement between the promoter, the corporation, and the third party in which the corporation assumes the liability of the promoter AND formally releases the promoter therefrom.

Question 4

When will a corporation become liable for a promoter’s contracts?

Answer 4

Either when

1. there is a novation OR
2. the corporation expressly adopts the contract OR
3. the corporation accepts the benefits of the contract.

Question 5

What is an incorporator?

Answer 5

The person who signs and files the articles of incorporation.

Question 6

Is the incorporator liable for pre-incorporation contracts?

Answer 6

Nope.

Question 7

What are the three key parties to any corporation?

Answer 7

1. Shareholders
2. Directors
3. Officers

Question 8

What is a corporation?

Answer 8

A separate legal entity

• Can sue and be sued
• Can last forever
• Shareholders have limited liability
  
  • not personally liable for the debts of the entity.

Question 9

What is the document that you file to create a corporation?

Answer 9

Articles of incorporation.

Question 10

Who do you file the articles of incorporation with?

Answer 10

The Pennsylvania Department of State

Question 11

What must the articles of incorporation include?

Answer 11

1. Incorporators’ names and addresses
2. Corporation’s name, which must be original and include “corporation, incorporation, company, limited,” or some abbreviation thereof
3. A designated agent (in PA)
4. Specified number of shares (but not necessarily the classes)
5. State of incorporation (has to be PA)
6. Duration (otherwise presumed perpetual)
7. Corporate purpose (otherwise presumed all-purpose)

Question 12

Must a corporation have bylaws?

Answer 12

No, but most do.

Question 13

What do bylaws do?

Answer 13

They lay out the ordinary operating rules of the corporation. They’re easier to adopt and change than articles of incorporation. Articles of incorporation are supreme, though.

Question 14

What happens if you don’t satisfy all of the requirements for the articles of incorporation?

Answer 14

Then your corporation will not be formed UNLESS you made a good faith effort to incorporate AND EITHER

• de factor corporation: you operate the business as a corporation without knowing that the requirements were not met OR
• corporation by estoppel: another party deals with the would-be corporation as if it were a corporation.

Question 15

What if the requirements for de facto corporation or corporation by estoppel are not met?

Answer 15

Then you’ll be personally liable for all obligations incurred in the name of the would-be corporation.

Question 16

What are ultra vires acts?

Answer 16

Acts that are outside the corporation’s powers granted by the articles of incorporation.

Question 17

Who can challenge ultra vires acts?

Answer 17

1. Shareholder
2. Corporation itself (if the act is done by an officer)
3. State (when the corporation ahs adopted a more limited busienss in its articles or bylaws)
4. NOT a third party to get out of a K, nor the corporation itself to get out of a K.