Promoter Liability: When You Remain on the Hook Once the Company Is Formed

Before setting up a business, whether it be a partnership, an LLC, a corporation, or the like, you are required to enter contracts to ensure smooth beginnings for your new venture. However, not many realize that you can remain individually liable on these contracts regardless of the form of business you set up. In legal terms, you were a promoter for the business before it even came into being. A promoter is the person who transforms an idea into an enterprise by bringing together persons and assets, and oversees the steps required to bring the enterprise into existence. What many promoters don’t realize is they remain on the hook personally for any liability that may arise from these contracts.

So when exactly do you remain personally liable? The general rule is that when a promoter makes a contract for the benefit of a proposed corporation, the promoter is personally liable on the contract, and remains liable even after the corporation is formed. There is one major exception: if the party who contracted with the promoter knows that the corporation was not yet in existence at the time of the contract and nevertheless agrees to look solely to the corporation for performance. The fact that a contracting party knows that the corporation does not exist is not sufficient, on its own, to release the promoter from any agreement.

Even if you are currently on the hook for a contract entered into as a promoter, there is a possible alternative to escape personal liability: a novation. You may be able to agree to have the contracting party replace the promoter with the now-existing corporation as the new liable party.

Were you involved in putting in place contracts for a corporation that had not yet been formed and are concerned you may still be on the hook for the contract if something goes awry? The legal team at the Trembly Law Firm has years of experience dissecting contracts and helping business owners understand their rights. Call the Trembly Law Firm at (305) 431-5678 today.