Formation - Acts


Corporation by Estoppel / De facto Corporation
A corporation whose existence may be inferred by a court, but whose incorporators have failed to meet the technical requirements for the formation of the corporation under applicable state law.

Formation: Acts

The final element in the process of incorporation is the act that the corporation is required to perform. As was the case with the other elements, people and paper, compliance with the rules regarding the various incorporation acts is critical to ensure that the business is properly formed. See 8 Del. C. § 103.

Signatures and Notarizations

To the outsider, it would appear that the favorite pastime of attorneys (and their paralegals) is chasing down clients to have them properly sign documents. While this appears to be a boring pursuit, proper signatures and, where applicable, notarization of the various incorporation documents are critical elements of the incorporation process.

EXAMPLE: State Y requires that all newly formed corporations get a signed, notarized copy of each incorporator’s criminal record for filing with the Secretary of State prior to registration as a new company. Such a requirement is generally legal and, in most cases, it will be the job of a paralegal to ensure that the form is obtained.

As we will discuss in the next section, the liabilities of a corporation have a proclivity to fall on the shoulders of its directors and officers. Similarly, the basis for obligations of the company in the formation process is on the incorporators. The basis of this liability is in contract, and those contracts must be signed. Thus, making sure that all signatures and notarizations have been provided is a critical item in the formation process; a step that often falls to the paralegal handling the incorporation to insure it happens smoothly.

Filing and Fees

Like the signing process, the act of actually filing the incorporation documents with the appropriate local, state, and federal agencies may appear, at first glance, to be an item of little importance. In truth, though, the actual filing of the incorporation forms is a critical moment in the formation process.

The moment of filing the Articles of Incorporation is a particularly significant moment for the company. The filing, made with the Secretary of State (in most states), provides conclusive evidence of the formation of the corporation. At this moment, the company is known as a de jure corporation – a corporation in form and fact. It is at this moment that company has been created as a legal entity and is thus capable of suing, being sued, entering contracts and performing a variety of other functions that are only available to a corporation under the law.

One item of note is that even if there are some violations of the corporate formation rules (such as missing signatures or irregularities on the forms or in the filing itself), it is possible that the corporation may still exist in the eyes of the court. While some states have done away with this rule, the doctrine of “corporation by estoppel,” also known as de facto corporation doctrine, means that in limited circumstances, the court will recognize the existence of a corporation even where there was a failure to correctly perform all of the actual acts of incorporating. In situations such as this, the court will test the intent of the incorporators, looking at: 1) whether they made a “colorable attempt to comply” with the state's incorporation rules, and 2) if the incorporators exercised some acts that are reserved to a corporation (such as contracting in the corporation’s name). Though this may seem like a trivial issue, it can be very important to shareholders who, via the existence of the de facto corporation, enjoy the limited liability of actual shareholders. Under the RMBCA, persons who purport to act as or on behalf of a corporation knowing that there was no incorporation are liable for all liabilities created in such action. See RMBCA 2.04.

EXAMPLE: The incorporators of New Co. have complied with the requirements of incorporation in State R except that they have failed to list their full company address on the Articles of Incorporation. New Co. goes out and rents machinery, hires staff and takes on several new contracts. When a member of the staff is injured on the job, he sues and argues that each of New Co.’s owners is personally liable for his injury because the company was not properly incorporated. The states that recognize the doctrine of "corporation by estoppel" would dismiss this argument by the employee as New Co. is effectively a corporation by estoppel.

The formation of a corporation by “estoppel” can also be important to determine whether the organization should be liable for the actions of one of its members. See American Vending Servs. v. Morse, 881 P.2d 917 (Utah 1994).

The corporation by estoppel is a dying breed. The doctrine originated in the days when the creation of a corporation could take months or even years as paper traveled slowly between individuals and the government. Circumstances are different in the modern, high-speed world. As such, the doctrine, which suggested that a corporation existed during that interim period (post creation but prior to governmental approval), is now as rare in the case law as a courier walking by foot between Albany and New York City to file Articles of Incorporation. The result is that, in most cases, even a moderate failure to properly comply with the requirements of incorporation will subject the corporation’s owners with personal liability for acts that would belong to the corporation had it been formally qualified and created.

As a final item of note, the legal professional, and paralegal in particular, must be certain that all fees required by the state and federal agencies involved with incorporation are paid in full. States such as Delaware garner a great deal of revenue from the incorporation of companies within their borders. While failure to pay will very rarely result in failure of the incorporation process, serious fines and, in some cases, criminal liability may attach if the fees are not paid promptly.

Organizational Meeting

Once all the forms are filed and the fees paid, it is time for the incorporators to hold an organizational meeting for the firm. If the incorporators are not the actual owners/managers of the firm, then the organizational meeting will likely serve the sole purpose of electing those owners and managers to the board. However, if the incorporators are to form the actual board of the company, the meeting will simply serve the purpose of adopting the company’s initial slate of bylaws to guide its early operations.

EXAMPLE: Larry, the paralegal at XYZ law firm, acted as the sole incorporator for Jumping Jack’s Inc. In truth though, the company was owned by none other than Jumping Jack himself. Thus, at the first organizational meeting, duly authorized and conducted in Larry’s cubicle at XYZ, Larry officially elected Jack as the sole director of the company.