Pre Incorporation Subscription: Everything You Need to Know
Pre incorporation subscriptions are pre-incorporation agreements that promoters are subject to and which state their duties and compensations.3 min read
Pre incorporation subscriptions are pre-incorporation agreements that promoters are subject to and which state their duties and compensations.
New corporations are often created by the efforts of promoters. These promoters may also have secured capitalization for the corporation by virtue of subscriptions.
Laws Controlling Promotion Contracts
Specific statutes, as well as general fiduciary principles, control promoters and their promotion contracts. Since the corporation did not exist before its formal creation, it can't be bound by agreements that were made before its incorporation — unless it ratifies the agreements after being created.
Stock subscriptions are defined as agreements that state the number of shares (of a yet-to-be-formed corporation) to be purchased at a particular price. This term is often used in sales agreements of post incorporation stock. If there is no corporate or statutory restriction, any corporation, or natural person with appropriate power, can subscribe to shares of corporate stock.
The creation of stock subscription contracts is generally governed by the rules and statutes applicable to contract formation. A completed stock subscription contract becomes existent when the corporation accepts the subscription offer. In the meantime, the subscriptions constitute a continuing offer if it is supported by adequate considerations such as subscription promises from other subscribers.
Pre-incorporation agreements can be described as follows:
- An agreement between individuals who contemplate the formation of a corporation in the future. Each individual designates the share volume he will take when the proposed corporation has been created.
- An agreement between an individual and promoters of a corporation where a promise is made by the individual to the promoters stating the number and class of shares that the individual will take when the promoters create the corporation. This differs from the former case because the agreement is between the promoters and a third-party individual.
- A transaction between an individual and an existing corporation where a designated number and class of shares are created for the individual. This occurs in cases where the delivery of a share certificate is contingent on the fulfillment of certain pre-agreed payments to be made to said individual.
- A contract between an individual and a corporation whereby it is agreed that a certain number and class of shares will be created for the individual. In this case, the contract may be between the corporation and an individual, or the corporation and a number of individuals. The subscription list is circulated among the individuals and signed by those who desire to have the additional shares created for them at a later date.
Creation of Pre-incorporation Agreements
Pre-incorporation agreements are created by corporate promoters who then create the company by filing the articles of incorporation. The corporation is not a party to the agreement since it hasn't been created yet. If for any reason the corporation isn't formed or doesn't adopt the agreement, the corporation's promoters could be held personally responsible for a breach of the agreement.
Pre-incorporation agreements usually state the intended legal name of the corporation. To indicate the limited liability status, some states also require the attachment of a suffix to the corporation's name. Before going ahead with the incorporation process, a name availability search must be performed to determine the availability of the chosen name and whether it is already in use. This can be done by checking your state's SOC website.
For corporations that will operate using a DBA, the trade name must also be listed. Doing this helps establish the intention of the corporation to use the name in business proceedings. This is a requirement for registering trademarks that are not in use.
The state of incorporation refers to the place where the corporation has its principal business location. However, individuals can incorporate in a different state and pay the fees for doing business in their home state. For instance, many individuals choose Delaware for incorporation purposes, due to the friendly nature of the corporation's legal system.
Although the differences between a current stock subscription and a pre-incorporation subscription agreement are considered by some as an unimportant part of corporation law, to others, it serves both a practical and theoretical value. However, it is basically a vague distinction whose only difference is in the manner of interpretation.
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