Personal liability

Personal liability is one of the main reasons why entrepreneurs incorporate. To avoid personal liability, you need to incorporate properly. If you incorporate your business as a corporation yourself and do not limit your activities to preparing and filing articles of incorporation, be careful. You may incur personal liability before your business corporation is a legal entity.

State courts usually say that a corporation is not bound by the incorporator’ s contracts with third parties prior to actual formation of the corporation, unless the contracts are later ratified by the board of directors or the corporation accepts the benefits of a contract.

For example, uses office space under a pre incorporation lease signed by an incorporator. The incorporator may be personally liable on these pre incorporation contracts unless the incorporator signs the contract in the name of the corporation only and clearly informs the third party that the corporation does not yet exist, may never come into existence, and, even if it does, may not ratify the contract.

So, if you must arrange for office space, hire employees, or borrow money before you form the corporation, make it clear that any commitments you make are for and in the name of a proposed corporation and are subject to ratification by the corporation when, and if, it comes into existence.

The other party may, of course, refuse to do business with you under these conditions and tell you to come back after the corporation is formed. Again, this is usually the best approach to pre incorporation business, anyway—namely, to postpone
business until after your articles have been filed and approved by the state. Once this happens, all contracts should be signed in the name of the corporation by a corporate director, officer, or employee.