The Floor to Carry: The Questions That Control the Result

The Promoter's Two Fronts: Personal Exposure and Fiduciary Profit

A promoter who signs for an entity that does not yet exist may become personally liable to the outsider while simultaneously owing fiduciary duties to the future entity. The analysis turns on the signer’s capacity, the contract’s allocation of liability, the entity’s later conduct, and whether anyone agreed to substitute or release a party.

Start with the exact event that creates the issue: a person signs a lease, purchase agreement, loan, employment agreement, or other contract “for,” “on behalf of,” or “as agent for,” a corporation or LLC that has not yet been formed. A signature such as “P, promoter for Newco, Inc., a corporation to be formed” is a strong trigger. So is a third party’s later suit against the individual after the entity has been filed, especially where the entity accepted the goods, occupied the premises, or made payments.

The baseline contract rule is that the promoter is personally liable on the pre-organisation contract unless the agreement clearly allocates liability only to the future entity or otherwise shows that the promoter did not undertake personal responsibility. Merely naming the proposed corporation does not accomplish that result. Under MBCA § 2.04, persons who knowingly purport to act for a corporation before incorporation are jointly and severally liable for liabilities created by that action. Read the signature and the contract together; do not decide from the caption alone.

The promoter’s liability and the entity’s liability are separate questions. The future entity is not liable merely because the promoter intended to act for it. After formation, the entity may expressly adopt the contract by resolution or agreement, or impliedly adopt it by accepting its benefits with knowledge of the material terms. Adoption makes the entity responsible under the contract, but it ordinarily does not release the promoter. Release requires a novation: agreement among the promoter, the third party, and the entity that the entity replaces the promoter.

The promoter also owes the corporation a fiduciary duty in arranging its affairs. The classic danger is a secret profit. For example, P buys land for $100,000 before incorporation and causes the new corporation to purchase it for $180,000 without revealing P’s interest or profit. P may not conceal the transaction or profit. The promoter must disclose material facts, including the promoter’s interest and the contemplated profit, to the corporation’s properly informed and disinterested decision-makers or other persons whose approval is required. A fully informed approval or a fair transaction may defeat a secret-profit claim; concealment supports rescission, recovery of the profit, or damages.

Recognition should be immediate when the facts include “to be formed,” “pending incorporation,” a promoter’s personal signature, a later board vote to “adopt,” an entity’s acceptance of contract benefits, an assignment to the new entity, an “assumption” agreement, or a demand that the original signer be “released.” A second cluster of triggers concerns property or services supplied by the promoter to the new entity: undisclosed markup, commission, ownership, side payment, or a transaction approved only by the promoter.

This topic is not starred: legal resources may be supplied when it is tested, and where they are not, you need only demonstrate recognition that the topic is at issue. You are not required to hold this topic cold because resources may be supplied; because you will not know whether resources are coming, the floor you must hold in memory is the vocabulary, sequence, and consequences below.

First ask whether the entity existed when the contract was signed. If yes, ordinary authority and party-status rules control. If no, identify the signer as a promoter and inspect the contract for an express allocation of personal liability.

Second ask whether the entity later adopted the contract. Adoption may be express or implied. A technical ratification is different: ratification is an existing principal’s affirmation of an act purportedly done for it, while a nonexistent corporation cannot technically ratify before it exists. A problem may use “ratify” loosely, but the legally precise label for the later corporation’s action is adoption. The important consequence is whether the entity became bound, not the label used.

Third ask whether the promoter was released. Adoption alone does not release the promoter. An assignment transfers rights, not automatically duties or liability. An assumption is a promise by the receiving entity to perform duties, but it does not ordinarily release the original obligor. Only a novation, or contract language that otherwise clearly releases the promoter, produces substitution.

Fourth ask whether the promoter dealt fairly with the corporation. A promoter’s personal benefit is not automatically forbidden; a concealed benefit is the problem. Disclosure and informed approval, or fairness where approval is not obtained, are the decisive facts.

The nearby entity rules prevent overgeneralisation. A partnership may already exist without a formation filing, so do not call every pre-filing partnership contract “pre-organisation.” Under RUPA § 301(1), a partner’s act apparently carrying on the ordinary course binds the partnership unless the partner had no authority and the person dealing with the partner knew or had received a notification that the partner lacked authority. By contrast, ULLCA (2013) § 301(a) says that a member is not an agent of the LLC solely by reason of being a member; ULLCA (2013) supplies no statutory ordinary-course or apparent-authority rule for LLC members or managers. Agency law and any filed statement of authority must do that work. The sibling chapter on defective formation owns de facto corporation and corporation-by-estoppel analysis; use it only if the facts make defective status, rather than promoter contracting, the real dispute.

The Contract's Afterlife: Adoption, Assignment, Assumption, and Release

These doctrines answer different questions:

An assignment is therefore a frequent near miss. If P assigns to Newco the right to receive machinery under P’s purchase contract, Newco may receive the benefit, but P’s payment and other duties do not disappear. If Newco separately assumes the duties, Newco has undertaken performance, yet the seller may still pursue P unless the seller agreed to a novation or is entitled to enforce the assumption as an intended third-party beneficiary.

Read a supplied provision quickly by isolating its operative verb, its required conditions, and its stated consequence. For example, in the provision below, “purport to act” identifies the conduct, “knowing there was no incorporation” identifies the mental-state condition, and “jointly and severally liable” supplies the consequence. Then map each fact to those words: who acted, what did the person know, and what liability did the action create.

Model Business Corporation Act (2016) § 2.04

All persons who purport to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created by such action.

Northstar Builders, Inc. was not incorporated when Priya signed a written agreement stating, “Northstar Builders, Inc., a corporation to be formed, will purchase the equipment from Seller.” Priya signed below that language as “Priya, promoter,” and the agreement did not state that Priya was released from personal liability. Priya knew no articles had been filed. Two weeks later, Northstar was incorporated; its board adopted the equipment agreement, accepted delivery, and paid the first installment. Seller later sued both Northstar and Priya for the unpaid balance.

Model Business Corporation Act (2016) § 2.04

All persons who purport to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created by such action.

For an unformed corporation, assuming the contract does not negate promoter liability and no separate assumption is being analyzed, the core release sequence is:

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Common errors are concrete failures to separate these doctrines:

• Treating “P signed for Newco” as proof that P cannot be liable ignores the contract and MBCA § 2.04.
• Treating the corporation’s acceptance of goods as an automatic release overlooks the requirement of a novation.
• Calling every post-formation approval “ratification” obscures that the later corporation adopted a contract made before it existed.
• Treating an assignment of P’s purchase rights as a transfer of P’s payment duties confuses rights with obligations.
• Treating a member’s LLC status as agency ignores ULLCA (2013) § 301(a).

Three Liability Snapshots: Adoption, fiduciary profit, and assumption

High-Yield Points - ⚡ Biggest Takeaways

Test promoter liability and entity liability separately. Adoption binds the entity; only novation ordinarily releases the promoter. An assignment transfers rights, while an assumption undertakes duties without automatic release. A concealed promoter profit creates a fiduciary problem even when the entity was later formed.