We advise and write frequently on personal liability of business owners. Certain entity forms, such as corporation and limited liability company (LLC), generally offer protection from personal liability for business owners. Although we discussed in our previous blog series “LLC Law Update: Piercing the Corporate Veil” situations where courts “pierce the corporate (or LLC) veil” to hold business owners liable for business debts, veil piercing is more of an exception than the norm for properly formed and operated entities. But what if there is no corporation (or LLC) in the first place?
Imagine this. You want to start a new company (let’s say a corporation), sign the paperwork required for incorporation, and send if off to your attorney or the Secretary of State. You then start conducting business, leasing an office, purchasing office supplies on credit, etc. in the corporate name. Several months later, you find out that the Secretary of State, for whatever reason, never processed your certificate of incorporation, meaning your company does not exist, at least not legally. In situations like this, courts may find a de facto corporation, imputing attributes of corporate liability protection, provided that there was a bona fide attempt to incorporate (i.e., mailing the certificate of incorporation to the Secretary of State) and actual use of the corporate form (i.e., carrying on the business as a corporation). Sometimes, even when there was no colorable attempt to incorporate, courts may still decline to impose personal liability on business owners, if the parties dealt with each other on the assumption that a corporation existed. This is called the doctrine of corporation by estoppel.
This is the first part of a multi-post series on de facto corporation and corporation by estoppel. In our next post, we will take a look at Cantor v. Sunshine Greenery, Inc., a classic case of a de facto corporation.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.