Meaning
Personal responsibility for contracts signed before a legal entity exists rests with the individuals who formed the venture. This pre incorporation founder liability ensures that vendors are paid even if the company is never successfully formed. If a founder signs a lease for an office before filing the articles of incorporation, that individual is typically on the hook for the rent.
The legal shield of a corporation only starts after the government accepts the filing.
Debt Obligation
Creditors can sue the founders personally for any unpaid bills incurred during the startup phase. Because pre incorporation founder liability is the default state, early stage partners often seek indemnity from the firm later. This risk remains until the company formally adopts the contract.
Ratification Benefit
Corporate board approval of the earlier deals can move the burden from the person to the company. Even after this step, pre incorporation founder liability might persist unless the vendor agrees to release the individual. Many suppliers insist on personal guarantees for this very reason.
Novation Process
Substitution of the company for the founder in a contract is the cleanest way to end the risk. A deed of novation ends the pre incorporation founder liability by creating a new agreement with the entity. This document requires the consent of all three parties.
