Pre-Incorporation activities, Promoters.


1.Corporation is a Legal Entity.


3.Fraud, Illegality, Injustice and Like.

4.Corporate Device to Avoid Obligations or Responsibility.

5.President is an Alter Ego of the Corporation.



The word "promotion" is a business, rather than legal term, usefully summing up in a single word a number of business operations familiar to the commercial world by which a corporation is generally brought into existence.



A promoter undertakes to bring about the incorporation of a business, procures for for it the rights and capital by which it is to carry out its purposes, and establishes it as able to do business.


A promoter brings together the persons interested in the enterprise, aids in procuring subscriptions, and sets in motion the machinery that leads to the formation itself. Promoters may act alone or with others to form a corporation, and may be natural or artificial persons. Accordingly, a parent corporation may be the promoter of its subsidiary.


A promoter, is one who takes an active role in organizing the financial structure of a proposed corporation, as is one who signs for equipment as president of a specified corporation before its actual incorporation. However, simply signing and verifying articles of incorporation and subscribing for stock in the proposed corporation does not make one its promoter.


A person is not a promoter who has no voice in, or control over the proposed venture, and has no independent right to participate in any profit it makes, or if his involvement in the organization of a proposed corporation is minimal.



Thus, one who, after explaining to others the nature of a proposed development venture and asserting his confidence that it would be a financial success, does nothing in furtherance of the organization of the corporation except assign his option of the to purchase property to the corporation and volunteer his attorney's services to prepare the necessary documents in connection with the sales of such property is not a promoter of such corporation.


Whether one is actually a promoter is a question of fact to be determined by the trier of facts based on the circumstances in each case.


The burden of providing that one is engaged in the activities of a promoter rests on the party claiming it.


Preincorporation agreements. In conducting the necessary transactions to the formation of a corporation, a promoter who may not be an incorporator, frequently enters into preincorporation agreements, including agreements with third parties, formal agreements and resolutions to incorporate, and stock subscription agreements.



Preincorporation agreements circumstances:



Where a considerable period of time will elapse between adoption of a plan to incorporate and completion on the incorporation process.


Where the business plan contemplates extensive financial contributions in advance of incorporation.


Where participants want to bind one or more of their number to make future financial contributions, particularly when such contributions are considered essential to the business venture.


When one or more participants are being induced to participate in the venture by promises of employment or some other business advantage rather than the mere prospect of owning stock.


Where protection of trade secrets or rather information property is necessary.


Preincorporation agreements should contain:



The state in which incorporation will be affected.


The money and / or property to be contributed by.


The stock to be issued.


The participants.


Contents of articles of incorporation and by-laws.


Identity of statutory agent.


Composition of initial Board of Directors and terms.


Special considerations:



Employment contracts.


Special contingencies.


Future financial commitment.


First right of refusal.


Confidentially or trade secrets with methods to settle such disputes.


A subscription agreement.


Preincorporation of close corporation with a pre-agreement. The close corporation agreements may be combined with the preincorporation agreement.


Preincorporation agreement checklist:


1. Names and addressed of parties.
2. Domicile of each party to serve as incorporator.
3. Proposed name of corporation, with name reservation.
4. Purpose for which corporation to be formed.
5. Place or places where the corporation to do business.
6. Proposed capitalization of corporation.
7. Requirements of statues under which corporation to be formed. Incorporators with qualifications and names of first directors.
8. Provisions for purchase of assets by corporations, if any.
9. Whether stock of corporation to be offered for sale to the public or privately.
10. Corporation goes to public, See public stock offering.
11. Partnership incorporation, See partnership incorporation.
12. Selection and designation of first directors to serve on corporation.
13. Selection and designation of first officers to serve after incorporation, including salaries.
14. Employment of firm attorney to perform legal services in connection with preincorporation and incorporation.
15. If tangible or intangible property to be exchanged of stock, or lieu of cash, valuation of property or method of determining value.
16. Subscriptions by incorporators.
17. In promotion agreement:
18. Duties of promoters.
19. Remuneration of promoters.
20. Restrictions on area of solicitation by promoters.
21. Use of prospectus.
22. Other restrictions or representations to be made in sales coli citations.
23. Employment contract with proposed new corporation.
24. Necessity of ratification by corporation after organization.
25. Duties of proposed employee.
26. Re numeration of proposed employee.
27. Term of contract.
28. Stock subscription rights, if any.

When drafting Preincorporation agreements and other instruments preliminary to incorporation, the particular statues where incorporation is to be formed must be observed. Also, the tax consequences of various aspects of incorporation should be considered at the outset.


Preincorporation stock subscription. A promoter may aid in securing preincorporation stock subscriptions as part of the organization of the financial structure of the proposed corporation.



A stock subscription, in the strict sense of the term, is an agreement to purchase, at a stated price, a stated number of shares of stock of a corporation which is to be formed, though the term is also sometimes applied to post incorporation agreements of this nature. The completed contract of subscription comes into existence when the corporation, after its formation, accepts the offer to subscribe. Meanwhile, the subscription constitutes a continuing offer if supported by an adequate consideration, such as the subscription promises of other subscribers.


Preincorporation stock subscription checklist:


1. Name and address of each subscriber.
2. Other identification of corporation.
3. Name of corporation to be formed.
4. Class and number of shares to be subscribed.
5. Statement of consideration for subscription, such as: subscription by others.
6. Conditions on subscription, if any.
7. Date on or before which subscription to be executed by issurance of stock and payment of subscription price.
8. Identification of subscriber as incorporator or promoter, in appropriate case.
9. Date of subscription agreement.
10. Special provisions regarding stock subscribed to, such as: redemption of preferred stock.


Promoters. Promotion duration and status , compensation and reimbursement of promoters, liability of promoters, fiduciary relationship and duties of promoters, duty of disclosure to stock purchaser by promoter, fraud representation, use of corporate funds, sale of property, sufficiency of disclosure of facts, ownership of stock by promoters or persons having knowledge of facts. See Promoters.
Action and remedies for improper or wrongful acts of promoters: Suits by stockholders, creditors and receivers against promoters, limitation of actions. Latches, persons liable as promoters, recovery, secret profit, failure to incorporate and receive value for stock or the like. See Promoters.


Corporations liability for promoters during preincorporation.
As a general rule, when a promoter makes a contract for the benefit of, or in the name of, a prospective corporation he is personally liable on the contract in absence of an agreement with the contracting party that the promoter is not liable. Further, if the promoter enters into a contract in his name for the benefits of the corporation, he is liable. However, if the person dealing with the promoter know that the corporation did not exist and the promoter did not intend to be liable, the promoter will not be liable. There is no implied warranty of authority to bind the corporation where the other party knows that the corporation does not exist and therefore cannot confer authority to contract. The promoter is not liable for a payment due under an agreement where the party with whom the promoter dealt looked only to the corporation for payment whether or not the party knew that the corporation did not exist at the time of the application.
Circumstantial evidence may be used to demonstrate that the contracting party impliedly agreed to look only to the corporation for performance. However, where promoter procures the execution of a lease to a corporation not yet in existence and the lesser has no knowledge of the nonexistence of the corporation at the time the lease is executed, the lesser is entitled to recover rent from the promoter though the corporation comes into existence prior to the start of the leasehold term.
Also, promoters who assume to act, requirement of promoter, contracts made by other promoters, promoter conducts business before incorporation, promoters with parties intent, promoters contract for the benefit of the corporation, parole evidence of the parties, new contract after incorporation, abandonment of promotion, promoters as fiduciaries and among themselves, agreements as to promotion, employment by proposed corporation, compensation for services and divisions of profits, enforcement of agreements for promotions and specific performance. See Promoters.


Liability of signers of articles of incorporation, signers of articles of incorporation who takes no active part in the management of the company and does not contract debts or incur liabilities or authorize ratify any contracts cannot be held liable by creditors of the company, either individually or as a partner. If the signer does, he is liable as a partner.

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