Congratulations on taking the steps to incorporating your company. Becoming a corporation has limitless benefits; chiefly, the opportunity to acquire expanded capital and limited liability. The steps involved in becoming a corporation in the eyes of the law can be tricky. It involves elaborate declarations and paperwork. Despite your best efforts to incorporate, things can often inadvertently go wrong without you realizing it, jeopardizing whatever limited liability you may seek. The worst part is, you may not even know you have exposed yourself to additional liability due to a mistake in the incorporation process. There are three scenarios that may arise when a person tries to incorporate which may or may not lead to certain limited liability protections.
De jure corporation. Your corporation will be considered a de jure corporation when you have done everything mandated by law to become a corporation. That is, a de jure corporation is a corporation that is organized with the requirements of the relevant statute. In these situations, no one can challenge the corporate state of your company, including private parties nor the state. A de jure corporation is a bona fide corporation that has fulfilled all requirements and granted limited liability protection under the law.
De facto corporation. A de facto corporation exists when steps are taken to incorporate the enterprise, but the corporation did not comply with every aspect of the applicable statutes. The corporation will not be protected against a challenge by the state in a quo warranto proceeding, but will be protected against third parties. Usually, courts will make a finding of a de facto corporation if the corporation meets three requirements: (1) there must be a statute in existence by which incorporation is legally possible (such as in Florida); (2) there has been a colorable attempt by the company to comply with the statute; and (3) some actual use or exercise of corporate privileges. A de facto corporation is basically a good faith attempt to become a corporation, but due to some technicality, does not fulfill every requirement needed.
Corporation by Estoppel. Even if your corporation has failed to fulfill the requirements of your state’s corporation statute, you may still be able to avail your company of limited liability. Estoppel occurs when a third party has dealt with your company on the basis and belief that your company is in fact a corporation. It is estopped from denying the enterprise’s corporate status. In essence, because it has dealt with the corporation under the belief it is the corporation – and the belief that it would not be able to later deny the fact the company has limited liability – the third party will not be able to later claim it is not dealing with a corporation.
Limited liability is the most important benefit of incorporating. Sometimes, it may be hanging in the balance without even realizing it, and it may be time to examine the status of your corporation. Call the Trembly Law Firm at (305) 985-4580 to schedule a consultation.
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