Promoting a Company: Some Tips for the Unwary
Before a corporation or limited liability company (hereinafter collectively referred to as the “company”) is formed, there have often already been numerous steps taken by those seeking to establish and incorporate the company. However, those taking these steps, often referred to as the promoters, must be careful that they do not incur liability that they may not have been aware of. Following are some tips that promoters should keep in mind to minimize their potential liability.
In general, a promoter is a person who organizes the people interested in establishing the company, assists with obtaining necessary funding and takes steps to incorporate or organize the company with the State of Missouri.
Problems often arise for promoters, such as when a promoter signs a contract for goods or services, intending the contract to be on behalf of the company he or she will be forming, but the promoter fails to properly disclose to the other party that he or she is acting on behalf of said company that has not even yet been formed. When the other party is not paid timely (or at all), the unpaid party will not only look to the company for payment, but will also demand payment from the promoter who signed the contract.
While the promoter may have valid defenses, it does not necessarily make him or her feel better when personally sued for payment, simply because he or she was the promoter who executed the contract. These cases become very fact intensive, often focusing on “who knew what and when?”, “what was really said before signing this agreement?” and “what were the parties’ intentions?”
With regard to pre-incorporation activities of a promoter of a corporation, Missouri law mandates that “All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation . . . , are jointly and severally liable for all liabilities created while so acting.” RSMo 351.053.
Similarly, with regard to pre-incorporation activities of a promoter of a limited liability company, Missouri law states:
A limited liability company may not transact business or incur indebtedness, except that which is incidental to its organization or to obtaining subscriptions for or payment of contributions, until the articles of organization have been filed with the secretary or until the formation date specified in the articles of organization. Persons engaged in prefiling activities other than those described in the preceding sentence shall be jointly and severally liable except as provided in this section for any debts or liabilities incurred in the course of those activities. This section shall not be interpreted to invalidate any debts, contracts, or liabilities of the limited liability company incurred solely on behalf of a limited liability company to be formed, nor shall it be interpreted to impose personal liability on the persons incurring such debts, contracts or liabilities solely on behalf of the limited liability company to the extent so disclosed or to the extent such debts, contracts or liabilities provide otherwise. RSMo 347.037. 4.
Based on the foregoing, you can see that promoters can often be held personally liable for actions, transactions and agreements entered into before formally establishing the company with the Missouri Secretary of State by filing the articles of incorporation or articles of organization, as the case may be.
One relatively simple step to minimize a promoter’s liability for pre-incorporation activities is to file the company’s articles of incorporation or articles of organization with the Missouri Secretary of State as the first step in getting ready to launch a new enterprise. Thereafter, all agreements and transactions can be executed in the name of the company, thereby significantly reducing the risk of the promoter’s personal liability. There are, of course, situations where a personal guarantee will be required, such as when a business obtains a loan from an institutional lender. While this cannot necessarily be avoided, it is important to take whatever steps possible and practical to reduce your risk of personal liability. In reality, however, filing with the Secretary of State is often one of the last steps taken in establishing a company, because the promoter feels he or she must accomplish “the other” tasks first.
While not as strong of a defense to potential personal liability as the previous suggestion, a promoter should always disclose verbally and in writing that he or she is acting on behalf of a company that is not yet formed and ensure that all other parties involved understand this.
In addition, it is important that promoters satisfy the fiduciary duties incumbent upon them. In particular, because promoters often have such extensive control over the company before, and sometimes after, its incorporation or organization, some courts have imposed on promoters fiduciary obligations toward both the company and those who contribute its capital. Promoter misconduct is regulated primarily by state and federal securities law, but the common law is still relied upon at times.
These fiduciary duties mandate that promoters act in good faith and with complete fairness in all their promotional activities and transactions. These duties arise prior to the formation of the company, once the promoters show a clear intention to promote the company.
Accordingly, a promoter should act with the utmost good faith in all transactions with the company, other promoters, and the company’s shareholders or members. Further, a promoter should act with the utmost candor and provide full disclosure of all material facts, at all times, to those he or she owes such duties. Also, a promoter should not take any advantage of those parties in any way or reap any secret profits.
While many people may not give much thought to their actions prior to formally launching a company by incorporating it or organizing it with the Missouri Secretary of State, these actions can indeed result in significant personal liability if not carefully considered. Thus, it is imperative that promoters of companies take every step possible to limit their personal liability as they prepare to establish their new venture. We hope the tips set forth above help you as you embark on your new business adventures.
Productivity Tip: The Pomodoro Technique
If you are like most people, you are constantly trying to cram more into each day. This can often lead to a sense of frustration as we do not achieve what we set out to do. While there are many systems out there to help you, one technique I find helpful is the Pomodoro Technique. The best thing is: it is free and easy.
Essentially, all you need to do is to set a timer for twenty-five minutes and focus on the task at hand. If you become distracted with a thought, simply make a note of it on a pad of paper next to you. When the timer goes off, take the next five minutes to focus on the items on your paper pad, or to simply take a break. After five minutes are up, start the next session. For more information, visit: http://pomodorotechnique.com/ or check the iTunes store for Pomodoro Technique apps.
We hope you receive some benefit out of this trick!