Meaning
Preliminary contracts establish the obligations and relationships of founders before the official formation of a corporation. Under a pre incorporation agreement, organizers agree on share allocation, initial capitalization, and intellectual property transfers. This document is signed prior to filing the articles of incorporation with the state.
Promoter Liability
Individuals acting on behalf of a non-existent company can be held personally liable for pre-opening contracts. A pre incorporation agreement specifies who bears the risk of these early liabilities until the corporation is formed. This protection is necessary when leases or purchase orders must be signed early, before filing of the articles.
Contract Adoption
The newly formed corporation does not automatically assume the contracts made before its existence. Once registered, the board must formalize the pre incorporation agreement through a process of adoption or novation. This action releases the promoters from personal liability and shifts the obligations to the corporation.
Founder Commitment
Startups require a clear plan for the division of equity and duties before work begins. The pre incorporation agreement outlines how many shares each founder will receive and the vesting schedule that will apply. This agreement prevents disputes among founders during the high-stress period before incorporation.
