Pre-incorporation contracts are agreements that are made between individuals or entities before a legal entity is officially incorporated. An example would be a group of investors who agree to form a new corporation, but want to establish certain terms and agreements beforehand. These contracts can be beneficial in terms of expediting the formation process and promoting clarity and efficiency in business operations. However, there are some legal considerations that must be taken into account when entering into pre-incorporation contracts.

One of the main concerns with pre-incorporation contracts is that they are typically entered into by individuals or entities who do not yet have the legal capacity to bind a corporation. That is, until a corporation is officially formed and registered with the appropriate government entities, it does not yet exist as a distinct legal entity. Therefore, any contracts that are made before incorporation can only be enforced by the individuals or entities who entered into them.

This presents an issue when it comes to assigning liability for any breaches of the contract. If a pre-incorporation contract is breached and damages are incurred, it may be difficult to hold the corporation liable for those damages since it did not yet exist at the time the contract was made. The individuals or entities who entered into the contract may be held liable instead, which can be a significant risk for those parties.

To mitigate this risk, it is important to include specific language in the pre-incorporation contract that outlines the parties’ intentions for assigning liability. This may involve specifying that any damages incurred will be the responsibility of the future corporation once it is formed, or alternatively, that the individuals or entities who entered into the contract will be jointly and severally liable for any breaches.

Another consideration when entering into pre-incorporation contracts is the potential for the contract to be deemed invalid or unenforceable. This can happen if the contract is entered into before certain legal formalities are completed, such as the filing of articles of incorporation or the approval of the corporation’s bylaws. Therefore, it is important to ensure that all necessary legal steps are taken before entering into any pre-incorporation contracts.

In conclusion, pre-incorporation contracts can be a useful tool for expediting the formation process and promoting clarity in business operations. However, there are several legal considerations that must be taken into account when entering into these types of agreements. Specifically, parties must be clear on the issue of assigning liability and must ensure that all necessary legal formalities are completed before entering into any pre-incorporation agreements. By doing so, parties can reduce their risk exposure and ensure that the contract is legally enforceable.