Your Liability for Pre-Incorporation Contracts

Your Liability for Pre-Incorporation Contracts - Sacramento Business Attorneys

Pre-incorporation contracts are contracts signed by an individual on behalf of a corporation that has not yet been incorporated. A corporation must file the necessary paperwork with the Secretary of State to be incorporated. This process might take some time and, while this process is pending, the individuals forming the corporation may need to sign purchase orders, leases, or other necessary contracts. The individual who signs one of these contracts lists the corporation's name, but the corporation is not technically in existence and will not be liable until the corporation adopts the contract.

Should I sign a contract prior to incorporating my business?

Any contract entered into prior to incorporation of your business is a possible liability for you, the "promoter." A promoter is a person or entity acting on behalf of the corporation not yet formed. As a promoter, you remain personally liable on pre-incorporation contracts.

I signed a pre-incorporation contract. What can I do now?

You, as the promoter, will remain personally liable on pre-incorporation contracts until there has been a "novation." A novation is a legal agreement between the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract. Therefore, without a novation, if a corporation is formed and the contract is adopted by the business, you and the business will be liable on the contract.

When does the business become liable for the pre-incorporation contract?

Your business will become liable on the contract when the business adopts the contract by either an express board of directors' resolution or an implied adoption through knowledge of the contract and acceptance of its benefits.

What if the corporation was never formed?

You, as the promoter, will be the only one liable on the pre-incorporation contract(s).

Contact Sacramento's Business Attorneys

It is always recommended that you enter into agreements and contracts after your business has been incorporated and under that entity's name. However, our Sacramento business attorneys realize that not every situation is ideal and sometimes you need to sign contracts before the business entity is incorporated. If you need help determining your possible liability or want advice on novations, contact our Sacramento business law firm to set up an initial consultation and we can discuss your liability for pre-incorporation contracts.

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*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact us for a consultation. Sacramento's business law attorneys discuss your liability for pre-incorporation contracts.