Forming a De Facto Corporation

In general, a corporation is a type of business formation. It occurs when all of the requirements listed within a state incorporation statute have been met and the business is formally recognized as a corporation under the law. In the majority of states, a corporation is formed by drafting and filing a legal document known as the “Articles of Incorporation”, with the appropriate government agency (usually the Secretary of State).

When a corporation is formed properly by taking the steps just described, it is referred to as a de jure corporation. “De jure” simply means “of law”. Therefore, a de jure corporation is one that is established through compliance and legally recognized as a corporation under the law.

For legal purposes, it is best to create a corporation by fulfilling all of the requirements and following the procedure laid out in your state’s incorporation statute. This will not only ensure that your business is in fact a corporation, but also that you are most likely filing corporate taxes in the manner that is required by Title 26 of the United States Internal Revenue Code.

In addition, forming a de jure corporation also possibly demonstrates to the court and other government agencies, such as the Internal Revenue Service (“IRS”), that you did not attempt to avoid your duties as a corporate entity or to evade U.S. tax laws.

Thus, if you are unsure of the requirements that must be met when forming a corporation in your state, you should speak to a local business law attorney immediately before you take any further actions to file as one.

What Are De Facto Corporations?

In contrast, a de facto corporation is one that is established by fact, but is not legally recognized under the law due to some sort of error. For example, if a business owner attempted to comply with all of the requirements listed in their state’s incorporation statute, but failed to file the Articles of Incorporation document in the proper manner when registering their business as a corporation.

In other words, a de facto corporation is a business that fell short of complying with the laws or following the process towards registering as a corporation, but could still become a corporation if those errors were fixed.

In order to gain legal recognition as a corporation, the owners of a de facto corporation will need to prove the following elements to the court:

• That there is an applicable incorporation statute in the state in which they are registering or are attempting to register as a corporation;
• That they made a good faith attempt to comply with the incorporation statute in that state (e.g., the Articles of Incorporation document was sent to the wrong government agency, got lost in the mail, or was filed too late);
• That they can provide evidence that the business is being run as if it were a properly registered corporation (e.g., the owners file corporate taxes); and
• Any other evidence that would demonstrate that the owners or assigned agents were unaware of their mistakes and genuinely believed their business was properly registered as a de jure corporation.

On the other hand, if the court or another government agency finds that the owners or agents were aware of their mistakes and did not attempt to fix them, then the de facto corporation will not be legally recognized as a corporation under the law. In which case, the members of a de facto corporation will not be permitted to enjoy any of the benefits of an actual corporation and thus may be held personally responsible for any losses or liabilities incurred by their business.

What Are The Benefits of Being Treated as a Corporation?

There are a number of important benefits that business owners can gain when they choose to register their company as a corporation.

In situations where a corporation is formed on a de facto basis rather than as a de jure corporation, the members of the corporation may still be able to reap some of these benefits if they can prove that they were unaware and did not intentionally cause the error that resulted in their business being improperly formed or registered.

One of the benefits that the owners of a de facto corporation may be able to receive if their business is legally recognized as a corporation are protections from personal liability. For instance, normally the directors, agents, officers, shareholders, and so forth of a corporation will be shielded from personal liability when the business suffers a loss or incurs a legal risk. If a de facto corporation is treated as a corporation, then members can gain this advantage too.

In contrast, if the members are unable to prove that they intended to form a corporation in good faith, then they may be able to be held personally liable for the losses or liabilities that their business incurs. This means that if someone sues their business like a creditor, then the creditor may be able to garnish wages and obtain money from the business owners’ personal checking accounts.

In some instances, a creditor or lender may even be able to take possession and evict a corporate member from their home if their business racked up enough debt and is not being treated as a corporation. If the corporate members can show that they did attempt to create a de jure corporation, however, then they may be able to avoid being held personally liable and can therefore keep their personal possessions.

Another major benefit that may be enjoyed by a de facto corporation if it is treated as a de jure corporation is that the business may be able to gain access to capital much more easily than it would if it was not legally recognized as a valid corporate entity. Part of the reason for this is because compliance with the law indicates to shareholders and prospective investors that their money will be safe from unnecessary risk and used for a proper purpose by a business.

Should I Consult an Attorney?

If you are thinking about structuring your business as a corporation or if you have violated the incorporation statute in your state, then it may be in your best interest to consult with a corporate lawyer in your area as soon as possible. An experienced business lawyer will be able to answer any questions you may have about your corporate matter and can explain how the laws in your state may affect the structuring of your business.

Your lawyer will also be able to guide you through the process of registering your business a corporation and can make sure that you understand the requirements of operating a corporation and that you comply with all of the applicable statutes and/or company guidelines. In addition, your lawyer will be able to review your incorporation documents before they are filed and can ensure that a corporation is the right business model for your company.

Finally, if there is a dispute involving your corporation or a related business matter, your lawyer will be able to assist you in resolving the dispute and can provide legal representation in court if necessary. Your lawyer can also help you prove that you attempted to register a de facto corporation as a de jure corporation as well as can potentially aid you in remedying that mistake.