Persons who want to form a business entity, such as a corporation or limited liability company, usually have a reason why they want to do so and what they want it to do. They are anxious to get started and forming a corporation seems a legal technicality. So they sign agreements before the entity is actually established. This is especially the case when the entity will exploit a business opportunity or do business with another party who does not want to wait. As attorneys, our advice is not to sign on behalf of a corporation which is not yet established. There is a risk of personal liability on those who sign on behalf of a non-existent entity.
For those truly in a hurry, this is less of a problem than it would be in the past. Virtually all states will offer to create a corporation or other business entity the same day or the next day. However, the problem still exists as illustrated by a recent Delaware case. (GS Petroleum v. R and S Fuel, Inc., Delaware Superior Court, No. 07C-09-023 RRC, issued June 4, 2009)
On March 13, 2006, Susan Stamm and Richard Simpson agreed to purchase from GS Petroleum the inventory and goodwill of a Shell gas station for approximately $120,000. There was a written agreement which was signed by Mr. Simpson under the name of "R and S Fuel Inc.", but was not signed by Ms. Stamm, although her name appeared on it. The problem was that "R and S Fuel Inc." did not yet exist. It was incorporated on March 27. After that, it began to operate the service station from April 15, 2006.
The rest of the story is predictable. R and S Fuel did not pay and GS Petroleum took the obvious next step of suing Mr. Simpson and Ms. Stamm personally on the debt.
The Delaware Superior Court decided, on summary judgment, that Mr. Simpson and Ms. Stamm were not personally liable on the debt. The court determined that R and S Fuel, Inc. had adopted the agreement, accepted the benefits of the agreement, and was obligated on the debt. But to release Mr. Simpson and Ms. Stamm, the court had to look at the intent of the parties.
It noted that the party to the agreement was "R And S Fuel inc." [sic] and was referenced in the Agreement as the singular "Buyer." It also noted that R and S Fuel, Inc. was incorporated only around two weeks later and was incorporated when it began to operate the service station, including obtaining a business license, opening a bank account, and filing a change of ownership form. Under these circumstances, the court concluded that the parties did not intend Mr. Simpson and Ms. Stamm to have personal liability.
In spite of this ultimately happy ending for the individuals, the case points up the risk of signing on behalf of a non-existent entity. First, Mr. Simpson and Ms. Stamm no doubt spent time and money in defending themselves from this claim. Second, the court focused on intent, which can be very fuzzy in an actual case. Here the corporation was formed shortly after the agreement was signed, but what if it had been formed much later? The corporation operated the business in the corporate name, but what if the business started operation just before incorporation? There are several factors the court cited in releasing Mr. Simpson and Ms. Stamm that could have been fortunate coincidences for them, rather than based on actual planning and legal protection.
So, regardless of the result, no one should put themselves personally at risk when they intend that a corporation, rather than themselves personally, will have the obligation. Especially at this time, where an entity, which provides protection against individual liability, can be formed almost immediately, there is no reason to do so.