De Jure Corporation: Everything You Need to Know
A de jure corporation is one that has fulfilled all the requirements mandated under the law and has had limited liability protection granted to the corporation.3 min read
A de jure corporation is one that has fulfilled all the requirements mandated under the law and has had limited liability protection granted to the corporation. De jure means "a matter of law," which validates the corporation as a legal entity.
De jure Corporation
A de jure corporation is organized with the requirements of the applicable statute. In the case of a de jure corporation, no one may challenge the corporate state of the company. This includes both private parties and the state.
As a bona fide corporation, a de jure corporation is entitled to issue stock to shareholders, hold board of director's meetings, and begin to conduct business.
De Facto Corporation
A de facto corporation is created when steps are taken to incorporate, but not all of the statutes are in compliance. With a de facto corporation, it is not protected if the state challenges it in a "quo warranto" proceeding. It is protected against third parties.
Courts can decide on a finding of de facto if three requirements are met by the corporation:
- A statute must be in existence that allows legal incorporation.
- The corporation has attempted to comply with the statute, which is considered a good faith effort.
- There has been actual use or the exercise of the corporate franchise.
De facto corporations are usually set up in good faith, but due to a technicality, it does not fulfill all of the necessary requirements. This can occur when an individual, working on behalf of the corporation, enters into a contract, but the corporation does not actually exist because all required steps have not been taken.
As recourse, the other party named in the contract may attempt to hold the first party liable because the corporation did not exist. The other party may counter with a defense on the grounds there was a de facto corporation and they should not be held liable.
If the test to decide de facto corporation status is met, it will be treated as though it had been validly incorporated. Doing so prevents creditors from placing a claim or claims against individuals based on the grounds of defective incorporation.
An example of a good faith situation is when the organizer of the corporation has been told by his or her attorney the articles of incorporation have been appropriately filed with the state, but because of an administrative or clerical error, they have yet to be filed.
When a company is recognized as a de facto corporation, the participants are shielded from personal liability.
The de facto corporation concept allows a court, under some circumstances, to treat an improperly incorporated corporation as if it had fulfilled all requirements for proper incorporation.
When discussing the de facto corporation doctrine, it is often referred to in the past tense. This is due to the Model Business Corporation Act (MBCA), which has purported to eliminate the de facto concept, once in 1950 and again in 1969 and in a 1984 revision. In some states, the 1969 version was adopted, and the de facto doctrine eliminated.
The 1984 revision of the MBCA tests for liability of a de facto corporation by determining if the participants know there was no incorporation. This is found in Section 2.04. If the participants acted in good faith and believed the corporation was incorporated according to all requirements, they will not be held liable for any obligations of an incorporated corporation that did not meet all requirements.
Corporation by Estoppel
Another law doctrine is a corporation by estoppel, which provides some protection to shareholders and officers of a company that did not fulfill all requirements. Because it was not properly established, it cannot be considered a de jure or a de facto corporation. It has failed to fulfill the corporation statute for the particular state.
When a third party has dealings with a company that it believes is a corporation, but it is not, estoppel occurs. What this means is the company is estopped from denying the other company's corporate status. Because of its dealings with the company it believed was a corporation, the third party cannot later claim it is not dealing with a corporation.
If you need help with a de jure corporation, you can post your legal need 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.