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Pre Incorporation Contract Essayshark

A pre-incorporation agreement is entered into by the corporate promoters, who form the company by filing its Articles of Incorporation. Since the corporation has not been formed yet, it cannot be a party to the agreement. If the corporation is not formed or if it fails to adopt the agreement, the promoters can be held personally liable for any breach of the agreement.

Corporate Name

The agreement should state the corporation's intended legal name. Check the website of the Secretary of State of the state of incorporation for information on how to perform a name availability search prior to choosing a name, to make sure that the intended name is not already in use. Your state also requires the corporate name to use a suffix, such as Inc., that indicates its limited liability status. If the corporation will operate under a trade name, list the trade name as well. Listing the trade name in the pre-incorporation agreement helps establish that the corporation intends to use it in business -- a requirement for registration of a trademark that is not already in use.

Incorporation

In the pre-incorporation contract, list the state of incorporation. Normally, the state of incorporation is the state where the corporation's principal place of business is located, although you may incorporate in another state and pay annual fees to do business in your home state. Many large corporations choose to incorporate in Delaware because of its corporation-friendly legal system. List the corporation's principal business address if it has already been selected. Select a registered agent, to whom all official communications to the corporation will be addressed. The registered agent need not be a shareholder, officer or director -- many corporations list their lawyer as their registered agent, for example. Most states require the registered agent to reside in the state of incorporation.

Equity Structure

List the number of shares that the corporation is authorized to issue and the number of shares that will initially be issued to shareholders. The total number of issued shares need not be equal to the number of authorized shares -- leave the corporation room to issue additional shares in response to future business needs. Name each shareholder and list the number of shares held by each.

Purpose

Many countries require a corporation to state its purpose quite specifically, and will not allow it to operate outside of that purpose. In the U.S., however, it is permissible to state the corporate purpose broadly -- "to perform any lawful activity" is acceptable, for example. Don't state the corporate purpose narrowly unless you have solid business reasons for doing so, because a narrow statement of purpose, if reflected in the Articles of Incorporation, can unnecessarily limit the corporation's flexibility.

About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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  • signing a contract image by William Berry from Fotolia.com

Suggest an Article Correction

A person who intends to form a corporation will often enter into contracts on behalf of the corporation before it is incorporated. For example, the promoter of a candy store might enter into a store lease prior to formation of the candy store corporation. If the corporation fails to honor the lease contract entered into by its promoter, an issue may arise as to whether the corporation, the promoter individually, or both, is liable for breach of contract. While the answer depends on the particular facts of each case, the promoter takes a significant risk by signing contracts prior to formation of the corporation. Such contracts should be carefully drafted to limit the danger that the promoter will be held personally liable.

The general rule under Massachusetts law is that a promoter may be personally liable for breach of a pre-incorporation contract, unless the circumstances demonstrate that the other contracting party intended to look only to the corporation for performance. The newly formed corporation may become liable on a pre-incorporation contract by, among other things, accepting the benefits of the contract (e.g. the candy store operating its business from the leased premises). The fact, however, that the corporation becomes liable on the contract does not, by itself, release the promoter from his or her individual liability.

A promoter hoping to avoid personal liability on a pre-incorporation contract must show that the other contracting party knew it was really contracting with a soon to be formed corporation and intended to hold only the corporation, not the promoter, liable under the contract. Obtaining such proof can be difficult. It is, therefore, advisable to include in such a pre-incorporation contract an explicit acknowledgement by the other contracting party that it understands it is contracting with the not yet formed corporation and that it will look only to the corporation, not the promoter, for performance. Including such a provision avoids misunderstandings and may save the promoter a great deal of money and aggravation.

Massachusetts attorney Roger T. Manwaring and Lawyers’ Legal Research & Writing provide high quality, cost-effective legal research and writing to attorneys in private and corporate practice.

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