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A person who intends to form a corporation will often enter into contracts on behalf of the corporation before it is incorporated. For example, the promoter of a candy store might enter into a store lease prior to formation of the candy store corporation. If the corporation fails to honor the lease contract entered into by its promoter, an issue may arise as to whether the corporation, the promoter individually, or both, is liable for breach of contract. While the answer depends on the particular facts of each case, the promoter takes a significant risk by signing contracts prior to formation of the corporation. Such contracts should be carefully drafted to limit the danger that the promoter will be held personally liable.
The general rule under Massachusetts law is that a promoter may be personally liable for breach of a pre-incorporation contract, unless the circumstances demonstrate that the other contracting party intended to look only to the corporation for performance. The newly formed corporation may become liable on a pre-incorporation contract by, among other things, accepting the benefits of the contract (e.g. the candy store operating its business from the leased premises). The fact, however, that the corporation becomes liable on the contract does not, by itself, release the promoter from his or her individual liability.
A promoter hoping to avoid personal liability on a pre-incorporation contract must show that the other contracting party knew it was really contracting with a soon to be formed corporation and intended to hold only the corporation, not the promoter, liable under the contract. Obtaining such proof can be difficult. It is, therefore, advisable to include in such a pre-incorporation contract an explicit acknowledgement by the other contracting party that it understands it is contracting with the not yet formed corporation and that it will look only to the corporation, not the promoter, for performance. Including such a provision avoids misunderstandings and may save the promoter a great deal of money and aggravation.
