Lecture Notes: Corporate Promoters and Liability

Introduction

• Presenter: Professor Michael Conklin, Texas A&M University School of Law
• Topic: Corporate promoters and related liability issues

Starting a Corporation

• Example scenario:
  • Idea for a corporation: restaurant selling flame-broiled burgers, "Hindenburg GERV"
  • Actions: taking on investors, signing contracts, hiring employees
  • Potential Issue: Before incorporation paperwork is filed, you are considered a general partnership

General Partnership vs. Corporation

• General Partnership:
  • An association of two or more persons as co-owners of a business for profit
  • Risks: Liability issues due to lack of incorporation
• Corporation:
  • Provides liability protection after proper filing
  • Chicken-and-Egg Problem: Need to conduct business but lack protection until incorporation

Role of a Corporate Promoter

• Definition: Someone who develops and organizes new business
• Responsibilities:
  • Arranges for the business to start operations
  • Acquires startup capital
• Pre-Incorporation Contracts:
  • Promoter can be held liable for these
  • Liability:
    • Formation of corporation doesn’t automatically release promoter from liability
    • Requires a novation by the corporation to take over contract

Mitigating Liability Risks

• Best Practices:
  • Enter contracts as "ABC Corporation, a corporation not yet formed"
  • Inform all parties the corporation has not been formed
• Secret Profit Rule (some states):
  • Promoter must disclose any profit made in transactions with the corporation
  • Legal if the corporation is informed first

De Facto Corporation Doctrine

• Scenario Example: "Thai-tanic" restaurant
• Elements Required:
  1. Good faith attempt to comply with incorporation rules
  2. Use of corporate privilege in the meantime
• State Variations:
  • Not all states follow this doctrine
  • Even if applicable, personal liability may occur
• Recourse: Potential to sue the lawyer for not filing paperwork properly

Conclusion

• Serving as a corporate promoter can be lucrative
• Extreme caution is required to avoid personal liability
• Prefer lawyers from reputable institutions (e.g., Texas A&M)