Corporations Flashcards
(6 cards)
1) When did Solar Inc. come into existence?
The issue is whether the corporation came into existence before its correct filing on December 10th. Solar Inc. came into existence as a de facto corporation on November 20th.
To form a corporation, there must be an incorporator who executed the Articles of Incorporation and delivers them to the Secretary of State. The Articles of Incorporation must state the corporations name, the incorporators name and address, the registered agents name and address in the state, and information regarding authorized shares. When parties attempt to create a corporation but, unbeknownst to them, the corporation fails to come into existence, the parties will be held personally liable because what ended up forming is a general partnership. A general partnership is where two or more people hold themselves out as co-owners of a business for profit. This is the default business form if an attempted corporation fails. However, if the parties were unaware of the failure to form the corporation, they can avoid personally liability by either proving that they formed a de facto corporation or there is a corporation by estoppel. A de facto corporation is proved when: (1) there is a relevant corporation statute; (2) the parties made a good faith, colorable effort to comply with the statute; and (3) the parties were acting as a corporation and exercising corporate privileges. A court will form a de facto corporation only when the parties were unaware of the mistake. Corporation by estoppel is when parties thought they formed a valid corporation and were conducting business as if they were one. They will be estopped from denying the business form and third parties will be estopped from denying that they are a corporation.
Application
Here, the woman, acting as incorporator for the attempted business, mailed the Secretary of State of State X Articles of Incorporation. The document included the required name of the corporation, the registered agent and the incorporator. However, the woman inadvertently failed to include the authorized shares. This failure meant that the corporation was not validly formed, and the woman and man had created a partnership instead. However, the woman can show that the there is a corporate statute, that she made a good faith, colorable effort to comply with it by following every step but that one inadvertently, and that Solar Inc. was exercising corporate privileges because it began entering into contracts. She can also show her good faith attempt to comply by the fact that when she discovered on November 30 that she had failed to properly file, she immediately revised the Articles and mailed them back, showing that she was unaware of her previous mistake. The court would likely rule that Solar Inc. was formed as a de facto corporation when the woman and man entered into a contract with a solar-panel installer because that is the first time that Solar Inc. attempted to exercise corporate privileges. Additionally, Solar Inc. and the installer will be estopped from denying that a corporation existed at this point because both treated the contract as if it was with a validly formed corporation. Therefore, Solar Inc. came into existence on November 20th as a de facto corporation and officially on December 10th when the Articles of Incorporation were filed.
(2) Is the woman personally liable to the installer on the employment contract that she signed?
The issue is whether the woman will be personally liable to the contract. The woman will likely not be personally liable to the contract. A promoter is someone who conducts business with others before a corporation is formed to receive finances or investments for the corporation. A promoter is personally liable on the contracts it makes unless the contracts specify otherwise. The corporation will become liable if it adopts the contract. However, a promoter will remain liable until the third party, corporation and promoter agree to a novation, substituting the promoter for the corporation as the solely liable entity. In general partnerships, each general partner is personally liable for the contracts and debts of the partnership. In corporations, shareholders enjoy limited liability and are not liable for the contracts of the corporation, only the corporation is liable.
Application
Here, if the woman is treated as a promoter because she technically entered into a contract before the corporation was formed, she would be personally liable on the contract until Solar Inc. and the installer agree to a novation. If a court treats this contract as forming through a general partnership, since a corporation had not yet been formed, the woman would also be personally liable to the contract. However, because a de facto corporation was likely formed when the contract was entered into on November 20, the woman will not be personally liable and will enjoy limited liability as a shareholder of Solar Inc. Therefore, because Solar Inc. was a de facto corporation at the time the contract was signed, the woman is not personally liable to the contract.
3) Is the man personally liable to the installer on the employment contract?
The issue is whether the man is personally liable on the employment contract. The man is not personally liable. Shareholders of a corporation enjoy limited liability and are only personally liable for their own stock. Additionally, directors and officers enjoy limited liability. The corporation itself is responsible for its debts. As noted previously, general partnerships and its partners are liable for the debts of the partnership. In a close corporation, a court can piece the corporate veil if it finds that the shareholders abused the corporate form and fairness requires holding them personally liable. A court will pierce the corporate veil in cases where the corporation has been undercapitalized at its inception or where the corporation is an alter ego for the shareholders.
Application
Here, the if the man and woman formed a partnership and the court holds the employment contract as one of the partnerships, the man (and the woman) are personally liable to the installer. However, if the court determines that a de facto corporation was created, the man is not personally liable and enjoys limited liability. This is not a situation where the court will pierce the corporate veil and hold the man personally liable because there is nothing to suggest that the man was acting through the corporation as an alter ego, or that the corporation was undercapitalized. The corporation itself is reasonable for the employment contract. Therefore, the man will enjoy limited liability and will not be personally liable for the installer’s contract.
