De Facto Corporation: Everything You Need to Know
A de facto corporation is a corporation that has been legally recognized, even if it has not filed its Articles of Incorporation.3 min read
A de facto corporation is a corporation that has been legally recognized, even if it has not filed its Articles of Incorporation.
Creating a Corporation by Estoppel
Creating a corporation offers a variety of benefits. For example, corporations provide limited liability protection to their owners and also make it easier to raise capital. Before a corporation will be legally recognized, however, several steps must be completed.
In particular, forming a corporation requires filing a large amount of paperwork and making intricate declarations related to incorporation. Unfortunately, it's possible you will unknowingly do something wrong while trying to incorporate, potentially stripping the liability protections that you are seeking. Even worse, you may make a mistake that exposes you to liability without even realizing that a mistake has been made.
In three specific circumstances, some liability protections may be created during the incorporation process. First, you may create a de jure corporation, which means you have completed the legal requirements for incorporation. De jure corporations have been organized based on the statute for corporations in their state. These corporations cannot be challenged by either the state or private parties. With a de jure corporation, you will have full limited liability protections.
Second, it is possible for a corporation to be created by estoppel. This means that you haven't met the requirements for forming a corporation in your state but can still shield your company from some forms of liability. In relation to corporations, estoppel occurs if a third party believes that your company is a legal corporation and deals with your company based on this belief. This belief that your company is a corporation prevents the third party from later filing a lawsuit claiming that they were not actually doing business with a corporation.
What Is a De Facto Corporation?
A de facto corporation will also provide you with some limited liability protections simply by engaging in the process of incorporation. Basically, a de facto corporation is a company that is recognized as a corporation by the state, even though the company has failed to file the required Articles of Incorporation.
Three basic requirements must be met before a company will gain the status of a de facto corporation:
- The state must have a relevant statute related to incorporation.
- The company must have attempted to comply with the statute in good faith.
- The company is being operated as a corporation and can provide evidence of same.
Another common definition of a de facto corporation is a company that has not completed the incorporation process but is doing business as if it were a legal corporation. De facto corporations can also be companies that have been suspended or dissolved but have not ceased operations.
In most cases, a de facto corporation is created when a company has attempted incorporation but failed to meet all the requirements of the incorporation statute in their state. While de facto corporations are not protected from the state, they are shielded from challenges raised by a third-party.
When a court case involves a de facto corporation, the courts will treat the company as a legal corporation in order to protect people who assumed that the company had gained corporate status. This is most common when a person agrees to a contract on behalf of a company that the individual believed was a corporation.
When this circumstance occurs, the other contracted party will claim that the individual holds contractual liability, as they signed, and since the corporation doesn't actually exist, the individual is the only person who could be held liable. To defend themselves, the individual can claim that the company they represented was a de facto corporation.
A good faith attempt to complete incorporation is one of the main requirements for gaining de facto corporation status. For example, if an attorney tells a corporate organizer that they have filed the Articles of Incorporation, but an error prevents this document from actually being filed, this would constitute a good faith effort.
When a company is able to prove they have met the requirements to be treated as a de facto corporation, individuals in the company will receive limited liability protection, meaning creditors cannot sue them for company debts.
If you need help understanding the requirements for a de facto corporation, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.