How should I reply? Using the IRAC method.

Manage Discussion Entry

Mia and Vincent should consider a corporate form of entity to provide personal liability protection not available under a general partnership. For simplicity, Mia and Vincent should incorporate their business in Texas since it will likely remain a closely held (not publicly traded) corporation, located in Texas and held primary by Texas residents. I would further suggest an S-corporation election be filed so that the corporation is taxed as a partnership thus avoiding double taxation. However, an S-election will prohibit multiple classes of stock or investment by anyone that is not a natural person.

As promoters of the yet-to-be formed corporation, Mia and Vincent should avoid entering any contracts on behalf of the corporation prior to its legal existence. Otherwise, they may be exposed to personal liability for those contracts. It is quick and inexpensive to form a corporation, so I recommend doing so very early in the planning stage, even if they are unsure if the business will ultimately consummate. Compared to the potential personal liability for a building lease or equipment purchases, the cost of forming and then dissolving a corporation will be negligible.

If for some reason the corporate filing is found deficient by the state, the promoters may still find some liability protection as a de facto corporation provided they made a good faith effort to comply with the incorporation statutes and consistently acted as a corporation.

If it is necessary to enter into contracts before de jure incorporation, they should be executed as "Mia and Vincent on behalf of Mega Moo-Shakes, Inc., a corporation not yet formed" to make it clear to all parties that the corporation is not yet existent. Even this is not guaranteed to avoid personal liability in all states or situations. Any personal liability will continue even after the corporation is formed unless there is a novation or other agreement to release liability.

If Mia and/or Vincent will profit from the promotion and formation of the business, they must ensure that the corporation receives notice of such to avoid a breach of trust and a secret profits fraud.

Finally, I would recommend that Mia, Vincent, and any other shareholders enter into a shareholders agreement formalizing any restrictions on the sale or transfer of shares and ratifying corporate governance documents.