Estoppel: The Final Saving Grace for a Pseudo-Corporation

Incorporating is a major step for any business. The benefits of incorporation are limitless. However, the main reason many incorporate is to allow their business to avail itself of limited liability. If the incorporation process is faulty, you may lose your limited liability protections. In those situations, it is important to know if you have any possible saving grace to protect yourself in a possible suit. This article discusses how a corporation can still protect itself in a possible suit when the plaintiff has been estopped from denying corporate formation.

Estoppel occurs when a party is unable to assert a new position based on the fact that they have previously maintained a position that is opposite to what they are now asserting. In a corporate context, this would refer to a third party dealing at arm’s length with what it believes to be a corporation. In the process, it understands that they are dealing with a company that avails itself of limited personal liability. As such, they have figured the risks that go into dealing with a corporation as compared to dealing with partnerships that do not have limited liability. Although courts no longer use the term “corporation by estoppel,” the doctrine still rings true in jurisprudence today.

The process then plays itself out as such: The third party realizes it has a suit against the corporation, but it wishes then to go after some deep pockets within the organization. They then do their research and realize that through some loophole, the corporation was not incorporated properly. The plaintiff then races to the courthouse to allege that the defendant is no longer a corporation, and therefore cannot avail itself of limited liability.

Courts frown upon such actions. It would be unjust to allow a third party to seek out the legal loopholes to avail itself of the possibility of a larger recovery. As stated above, these third parties understood the risks when dealing with a corporation, and therefore courts do not wish to undermine the corporate structure when the plaintiff had already dealt with the defendant at arm’s length as a corporation.

In sum, even if your incorporation process was defective, all hope is not lost with regards to limited liability. If you have dealt with a company that previously acknowledged your corporate identity, that company cannot then turn around and accuse you of not being a corporation. A proper defense can ensure you still have limited liability. Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.