Promoter Liability for pre-incorporation acts on behalf of a proposed California Corporation?

⚖️ Pre-incorporation acts by a Promoter

Promoters are persons acting on behalf of a Corporation that has not yet formed.

Prior to incorporation it is common for a promoter to raise capital and contract for a location, business materials, equipment, etc.

Liability for Promoter Contracts: Promoters are personally liable for pre-incorporation contracts until:

✅ There has been a novation replacing the promoter's liability with that of the Corporation; or

✅ There is an agreement between the parties that expressly states that the promoter is not liable.

Right of Reimbursement: The promoter may have a right to reimbursement based on quasi-contract for the value of the benefit received by the Corporation, or on the implied adoption of the contract.

A Corporation is not generally liable for, or bound to, pre-incorporation contracts except where the Corporation expressly:

✅ Adopts the contract; or

✅ Accepts the benefits of the contract.

Note: The promoter is also still liable unless there has been a novation or express agreement between the parties that the promoters will not be liable.

Promoter Duties: A promoter has a fiduciary relationship with the Corporation requiring good faith.

Promoters cannot make a secret profit on their dealings with the Corporation.

Credits:

This FAQ was prepared by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.