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Pre-formation Contracts: Avoiding Personal Liability

Logo for LinkedIn, where Dana Shultz answered a question about pre-formation contractsThis post is based on my answer to a LinkedIn question [before the LinkedIn Answers feature was terminated] – the answer would be similar for a contract entered into before a corporation, rather than LLC, is formed:

I signed a lease for office space one day before my LLC became active. Am I personally responsible for the lease?

The answer:

You entered into what is called a pre-formation contract. You intended to bind the LLC by acting as an agent of the LLC (your principal). However, because you signed the lease before the LLC came into existence, there was no principal, so you did not act as an agent. Instead – as you fearyou entered into the lease as an individual.

It is possible that the landlord will never notice this fine point. However, if you were to end up in litigation over the lease, it is safe to assume that the landlord’s counsel would notice.

If you explain the situation to the landlord and the landlord is willing to work with you to “paper over” this problem, there are several ways to do so. Generally, now that the LLC exists, the landlord and the LLC need to sign a document establishing that the LLC, rather than you, is the tenant. In addition, the Manager(s) of the LLC should, in accordance with the Operating Agreement, approve a resolution authorizing entering into the lease.

Related post: Who Is Bound by a Pre-incorporation Contract?

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

  1. 8/26/2009 | 8:20 pm Permalink

    Promoter liability; Corporation class all over again! :)