What Happens If Your Incorporation Was Defective?

Incorporating is a major step for your business in the right direction. It signals to yourself and others that your business is to be taken seriously. Most importantly, it allows you to avail yourself of several benefits otherwise unavailable. This includes special tax treatment and limited personal liability. But what happens if your incorporation was defective? Does that mean you automatically lose those protections of a corporation? Not necessarily. However, it may depend on whether or not you were, in good faith, under the belief you were a corporation.

The first step in incorporating is filing articles of incorporation with your state. This must be done according to state statute. If you have fully complied with your state’s statute, then you have nothing to fear. At this point, your corporation was historically considered a de jure corporation, and you will be given the full protection of a corporation. However, many times corporations have not properly incorporated without realizing it, therefore exposing themselves to unwanted risk. In this situation, the court will examine how you incorporated, and whether it was done in good faith.

If you have made a good faith attempt to incorporate, and sincerely believe that you took all the proper steps to incorporate, you will be able to avail yourself of some of the corporate protections. For example, if other private parties challenge you in court, you will still be able to avail your corporation of limited personal liability. However, this will come down to examining whether or not your corporation had made a good faith attempt to incorporate. If so, only the state can challenge your corporate stature in any proceeding.

One other saving grace if your corporation was defectively incorporated is what was historically considered corporation by estoppel. Although courts no longer utilize the term estoppel, its doctrines still hold true today. Estoppel, which is discussed in more detail in another post, occurs when a third party has dealt at arm’s length with a corporation believing it is a proper corporation, and that they cannot attempt to pierce the corporate veil for personal liability. They have already taken such a risk into account, and it would be unjust to then allow them to go after a shareholder’s personal assets.

Incorporating is a major, and intricate, step in the lifespan of a business. If not done correctly, a corporation’s constituents can lose many of the protections that would normally be afforded to them. Rather than hoping your corporation can still receive protections despite imperfect incorporation, it is best to ensure your incorporation process was done correctly the first time. That is why it is best to consult with a business lawyer who has years of experience assisting small business owners. Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.