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Corporations • Formation Requirements
CORP#012
Legal Definition
A business failing to achieve de jure corporate status is nonetheless treated as a corporation if the organizers have made a good faith, colorable attempt to comply with corporate formalities and have no knowledge of the lack of corporate status.
Plain English Explanation
If people made a good faith effort to form a corporation, but unknowingly failed, the law will treat them as if they succeeded. Why is this important? Because one of the primary purposes of a corporation is to shield its shareholders from liability, so if a bunch of people are acting as if they are protected from personal liability only to find out that technically they didn't actually have a corporation, the law will sometimes pretend as if they did.
Hypothetical
Hypo 1: Bob and Sam want to start a corporation, WidgetCorp. They have a big meeting with suppliers lined up and want to act fast, so Bob and Sam spend all night filling out the paperwork required to incorporate and immediately put it in the mail. Unfortunately, Sam doesn't realize that the pen he was using to fill out the paperwork was his son's, which was a magic disappearing ink pen. Sure enough, when the Secretary of State receives their application, it appeared blank and was tossed in the garbage. The next day, Sam meets with a supplier and signs on behalf of WidgetCorp to accept a $10,000 purchase of equipment. Result: Here, Sam is technically personally liable for the purchase agreement because WidgetCorp doesn't exist. At best, Sam is sort of like a promoter, and as you'll learn in other cards, promoters can be held liable for the agreements they make. However, unlike a promoter, Sam legitimately believes WidgetCorp exists and is acting upon this good faith belief. Thus, it is possible that a court will find WidgetCorp to be a de facto corporation and allow Sam to avoid personal liability for the purchase agreement.