PRE-INCORPORATION TRANSACTIONS Flashcards
(4 cards)
CORPORATION
A corporation is a legal entity (a separate person) distinct from its owners and may be created only by filing certain documents with the state. The owners (SH) are not personally liable for the obligations of the corporation itself, neither are the directors or officers and only the corporation itself can be held liable for corporate obligations. The right to manage the corporation is centralized in a board of directors, who delegate day-to-day management duties to Officers.
Perpetual in existence.
Enter contracts, transfer property, buy/sell securities, political contributions up to $5k/yr/organization, Charitable contributions – no ceiling, guarantee loan outside of the business, no liability for people in the corp & for SH, CORP IS LIABLE!
Liability of Corporation for Pre-incorporation Ks
A Promoter’s liability continues after the corporation is formed, even if the corporation adopts the contract and benefits from it. The promoter will only be released from liability if there is express or implied novation among all three parties. However, within a reasonable time after incorporation, the corporation can adopt the contract if they adopt:
i. Expressly adopt by board approval/action.
ii. Impliedly adopt when they had reason to know, or knew of the material terms of the K, AND accepts a benefit of K.
Liability of Promoter for Pre-incorporation Ks
Promoters take the preliminary steps in organizing the Corp, such as entering into contracts. They have a fiduciary duty to the corporation of fair disclosure and good faith. Unless the contract clearly states otherwise, Promoters are personally liable until Corporation is formed and releases the promoter and assumes liability through a novation. The K must specify that Promoter is to be replaced by the corp, but until Novation, both corp and promoter are liable.
Secret Profit Rule
A promoter cannot make secret profits on dealings with corporation, if she does, she is liable and has to account for the profit. If the profit is disclosed to the corporation, its allowed. Sale prior to becoming a Promoter? Profit = price paid by corp – FMV. Sale AFTER = Corp Paid Price – Promoter paid price.
