Meaning
Agreement entered into by a promoter or founder on behalf of a corporation that has not yet been formed. This pre-incorporation contract creates a unique set of liabilities because the intended principal does not yet exist to accept the obligation. Liability stays with the signer.
This responsibility remains until the corporation is formed and formally adopts the agreement through a process known as novation.
Adoption Mechanism
After the charter is filed, the board of directors must pass a resolution to ratify the agreement. Simple use of the goods or services by the new company might also constitute an implied adoption of the pre-incorporation contract in some jurisdictions. However, the founder is not automatically released from the debt just because the company starts paying the bills.
A clear written record of the transfer of liability is the only way to ensure the individual is no longer at risk.
Agency Issue
The person signing acts as a promoter rather than an agent because there is no existing principal to grant authority. Third parties who sign these deals are often aware of the situation and rely on the personal credit of the founder. If the venture fails to incorporate, the founder is left with the full weight of the pre-incorporation contract and no company to shield them.
This creates a high-stakes period of personal exposure during the very earliest days of a startup.
Enforceability Range
Ratification by the board allows the corporation to sue on the contract. It provides the legal link between the company and the pre-incorporation contract.
