What Happens If Your Incorporation is Defective?

Incorporation is one of the most important and beneficial steps your company can take.  It entitles you to special tax treatment, as well as the desired limited liability whereby your personal assets are not subject to any suit.  However, incorporation is a tricky procedure.  It requires strict compliance with state statutes.  In Florida, for example, you must submit articles of incorporation to the Department of State.  The articles must include several mandatory provisions.  The corporation must further hold an organizational meeting to elect directors. Finally, the corporation must decide who will be considered the incorporators, which can be any entity or natural person 18 or older. If a company does not incorporate properly, it may lose the protections it would otherwise receive as a corporation.

What happens if your company’s incorporation was defective can vary based on the facts.  To do so, it is important to understand some historical terms that, although abandoned by courts, still hold true.  When a company’s incorporation was faulty, but was the result of a good faith attempt by the corporation, the corporation is considered a de facto corporation.  Whether an attempt to incorporate was made in good faith will be determined on a case-by-case basis.  There must, at the least, be a firmly held belief by the company that it had properly incorporated, and that only through some loophole it did not properly incorporate.  If a court applies the doctrine of de facto corporation to your company, you will be protected from private parties levying suits against you.  However, you are not protected from suits brought forth by the state.

There is one other scenario whereby defective incorporation will still protect a company from personal liability known as corporation by estoppel.  Again, this is a historical term that courts do not use anymore, but courts still apply its doctrine.  When a private party treats a company as a corporation, they cannot then accuse the company of not being a corporation.  This is done because the third party expects to be dealing with a corporation, and have taken a calculated risk in dealing with a company it believes is protected by limited liability.  In such a scenario, the courts still protect the company despite faulty incorporation.

In sum, there are some scenarios whereby companies are still protected from personal liability despite faulty incorporation. However, companies that seek to incorporate should not have to worry about what would happen when it turns out their incorporation was faulty.  Having the right legal team take you step by step through incorporation can help ensure proper incorporation.  Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.