Promoters, preincorporation contracts, de facto corporations, and corporation by estoppel

Black-letter propositions

1. 01

   As a general rule, promoters are personally liable for the contracts they make, even though made on behalf of a corporation to be formed.

2. 02

   A promoter is not personally liable if the contracting party knows the corporation is not in existence but agrees to look solely to the corporation and not to the promoter for payment, and the agreement to release the promoter may be shown by circumstances making it reasonably certain that the parties intended it.

3. 03

   A person who funds a corporation only nominally and who deals for it before it exists cannot deny being a promoter.

4. 04

   A corporation is de facto where there was a bona fide attempt to organize it in the manner the statute prescribes and there was an actual exercise of corporate powers, as by negotiating and signing a contract in the corporate name.

5. 05

   When a party knowingly dealt with the entity as a corporation, the party may be estopped from attacking its legal existence collaterally in order to impose personal liability on the individual, so a person who acted for a de facto corporation is not personally liable as a promoter.

6. 06

   A corporation is not de jure if the certificate of incorporation was filed after the contract was signed, even if the filing was mailed before, so the de facto and estoppel doctrines may apply in the absence of a statute displacing them.

7. 07

   Under a statute providing that a corporation comes into existence only when the certificate issues, there is no corporation de jure, de facto, or by estoppel before the certificate issues, and the persons who assume to act as a corporation without authority are jointly and severally liable for the debts incurred.

8. 08

   The doctrine known as corporation by estoppel has been criticized as a misnomer because there is no corporation and often no holding out followed by reliance.

9. 09

   Under the North Carolina Business Corporation Act, corporate existence begins when the articles of incorporation become effective, and the Secretary of State's filing of the articles is conclusive proof that the incorporators satisfied the conditions precedent to incorporation, except in a proceeding by the State to cancel or revoke the incorporation.

10. 10

    Unless the articles provide otherwise, a shareholder is not personally liable for the acts or debts of the corporation, except that the shareholder may become personally liable by reason of his own acts or conduct, and a purchaser of shares is liable only to pay the consideration for the shares.

Use this attack sequence under time

Common wrong turns

• A promoter who signs for a corporation to be formed is liable unless the other party agrees to look only to the corporation.
• A late-filed certificate can defeat de jure status but may still leave a de facto corporation in jurisdictions that recognize it.
• Under a statute that makes filing the cut-off, there is no de facto corporation or corporation by estoppel before filing.
• A shareholder's limited liability does not shield the shareholder from liability for the shareholder's own acts.

Worked example

A person signs a lease for the business in the name of a corporation that has not been formed, and the landlord knew the corporation was not yet formed but insisted on a personal guarantee. The corporation is later formed, and the business fails.

Practice this topic

Promoter liability

Coopers and Lybrand v. Fox stated that as a general rule promoters are personally liable for the contracts they make on behalf of a corporation to be formed, that the exception is where the contracting party knows the corporation is not in existence but agrees to look solely to the corporation and not to the promoter, and that the release may be shown by circumstances making it reasonably certain the parties intended it, and it treated a person who had funded the corporation only nominally as a promoter.

De facto corporations and estoppel

Cantor v. Sunshine Greenery held that a corporation whose certificate was filed two days after a lease was signed was not de jure but was de facto, because there was a bona fide attempt to organize it and an actual exercise of corporate powers by negotiating and signing the lease, and that because the lessors knew they were dealing with the corporate entity they were estopped from attacking its existence to impose liability on the individual, who therefore was not liable as a promoter.

Robertson v. Levy explained that under the District of Columbia statute a corporation comes into existence only when the certificate issues, so there is no corporation de jure, de facto, or by estoppel before then and persons who assume to act as a corporation without authority are jointly and severally liable, and it described corporation by estoppel as a misnomer because there was no corporation and generally no holding out followed by reliance.

North Carolina provisions

North Carolina General Statutes section 55-2-03 provides that corporate existence begins when the articles of incorporation become effective and that the Secretary of State's filing is conclusive proof that the incorporators satisfied all conditions precedent to incorporation except in a proceeding by the State to cancel or revoke the incorporation.

Section 55-6-22 provides that a shareholder is not personally liable for the acts or debts of the corporation unless the articles provide otherwise, except that the shareholder may become personally liable by reason of his own acts or conduct, and that a purchaser of shares is liable only to pay the consideration for them.

Frequently asked questions