Meaning
Contracts entered into by promoters or founders on behalf of a business entity that has not yet been legally formed. These pre incorporation agreements allow the founding team to secure leasehold property, hire staff, acquire machinery and purchase initial equipment before the filing of articles. They establish the initial obligations of the parties to the venture.
The validity of these documents depends on the eventual formation of the company and the adoption of the terms.
Liability Assumption
Individual promoters remain personally liable for the obligations in the contract unless the company formally takes over the debt. A pre incorporation agreements clause usually specifies that the entity will indemnify the founder once it exists. Until that moment, the counterparty looks to the individual for payment.
Ratification Process
Adoption of the contract by the new corporation requires a formal vote by the board of directors. Once the company ratifies the pre incorporation agreements, the personal liability of the promoter is typically extinguished. This process creates a clean break between the setup phase and the operating phase.
Funding Commitment
Investors sign binding term sheets to guarantee capital. These pre incorporation agreements ensure that the business has cash to begin.
