A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. Explain and illustrate.

A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. Explain and illustrate

Introduction: Promoters are people who bring a corporation into being. Thus promotion is a vital activity in a free enterprise system .The promoter is the person who has the idea for a business. The person finds people who are willing to finance it – to buy shares of stock and/ or to lend money and credit. Contracts must be made for building or leasing space, buying or renting equipment, hiring employees, buying supplies and advertising, and whatever else is required for the early operation of the business. Most state incorporation statutes permit reserving a name for a proposed corporation. This is also done by the promoter. Promoter must arrange for the filing of the legal papers to incorporate the business and promoter will usually guide the corporation through the early months or years before the new company is a “going concern”.

While the promoter may start with an idea and build a corporate business around it, this is not always the case. In many instances, the promoter will take a sole proprieter rship or partnership and convert it into the corporate form. And, of course, rather than always having a single promoter, frequently the corporation will be created through the vision and efforts of a group of promoters.

Legal liability of promoters:

Liability to the corporation:

The relation of promoters to the corporation, to its shareholders, and to those with whom they contract is unique. Promoters are not agents of the corporation prior to its incorporation because the corporation (the principle) is not yet an existence. Promoters are not agents of the persons who are interested in the venture because the promoters were not appointed by them and are not under their control.

Nevertheless, promoters owe a fiduciary duty to the corporation and to the persons interested in it. This includes the duties of full disclosure, good faith, and absolute honesty to the corporation and to the original shareholders. Thus, it would be a breach of duty to use money received in common subscriptions to pay the expenses of forming the corporation unless this intent were disclosed.

A promoter often takes an option on property or makes an outright purchase on behalf of the corporation. If he or she misrepresents the price paid or to be paid, the corporation may recover the secret profit made by the promoter. However, if the promoter makes a full disclosure of the expected profit to an independent board of directors, the corporation cannot recover. Of course, if the board of directors is under the control of the promoter, the corporation could rescind the contract or recover damages for breach of the fiduciary duty.

Liability to third parties: Promoters are generally held liable on contracts they make on behalf of corporations that are not yet formed. I f the corporation is never formed, or if it fails to adopt the promoter’s pre-incorporation agreement, the promoter is liable. This is based on agency law: An agent who makes a contract for a nonexistent principle is personally liable on it. If there is more than one promoter, they are all liable under a joint enterprise theory. Promoters sometimes attempt to escape this potential liability by having the third party agree, when the pre-incorporation contract is made, that the promoter is not to be liable. The disadvantage of this strategy, however, is that neither the promoter nor the corporation can force the third party to perform such a contract. This results from the rule for bilateral contracts that if one party is not bound, neither is the other because such contracts like mutuality.

After the corporation comes into existence, it may agree to assume liability for the promoter’s incorporation contracts. Such an agreement between the promoter and the corporation, in and of itself, is not sufficient to relieve the promoter from all liability on the contracts. This is because the third party contracted directly with the promoter. The promoter is released from liability on the pre-incorporation contracts only if the corporation, the promoter, and the third party all agree that the corporation will be substituted for the promoter. This agreement is called a novation.

Liability to the promoter: As a general rule, corporations are not required to compensate promoters for the services they render during the pre-incorporation period. However, there is nothing illegal or wrong if the promoters are paid for the services. Frequently, promoters are issued shares of the stock of the new corporation for their services. In the past, many states had not permitted promotional services to be used as consideration for shares in the new corporation. However, the current trend in law, as evidenced by the revised MBCA, is to permit the corporation to issue shares in return for the promoter’s pre-incorporation services.

Corporations are extremely important in today’s society. The growth of the modern corporation has been largely responsible for the dynamic economic development attained by this country over the last century. Through corporations, people are able to invest money in a business enterprise without worrying about unlimited liability or management responsibilities. Thus, corporation law gives the business the capability to raise the capital necessary to achieve the economics of scale vital to economic efficiency.

Liability on pre-incorporation contracts: Before incorporation After incorporation,After incorporation,Before adaptation          after adaptation Promoter contracts with third party Promoter: liable to third party.Promoter: liable to third party.                  Promoter: liable until novation.

Third party unaware that contract is for Corporation: No liability. Corporation: No liability. Corporation: liable to third party.

corporation Third party: liable to promoter.Third party: liability to promoter.Third party: liable to incorporation. After novation. Promoter contracts with third party Promoter: no liability. Promoter: no liability.Promoter: no liability.

Third party agrees to hold only the corporationThird party: no liability.Third party:  no liability.Third party: liable to corporation.Liable Promoter contracts with third party for benefit Promoter: liable to third party.Promoter: liable to third party. Promoter: no liability of corporation with out disclaiming liability, Corporation: no liability.Corporation: no liability.     Corporation: liable to third party.Third party: liable to promoter.Third party: liable to promoter.Third party: liable to corporation.

Importance of corporation:

Corporations are extremely important in today’s society. The growth of the modern corporation has been largely responsible for the dynamic economic development. Through corporations, people are able to invest money in a business enterprise without worrying about unlimited liability or management responsibilities.Thus, corporation law gives business the capability to raise the capital necessary to achieve the economies of scale vital to economic efficiency.

The principle characteristics of the corporation: The concept of a corporation developed in early law. One advantage of the corporate form of business is that it makes it easier to hold property for long periods of time. This is because the corporation is treated as an intangible being with a life separate from the lives of its owners. Other powers also came to be associated with the corporate form of organization early on. Because of its separate identity identity, the corporation can hold and convey property in its own name. Finally, a corporation possesses the right tomake by laws to govern the relations among its members.

Types of corporations:

Today, three principle types of corporations are commonly recognized.

Governmental corporations:

The governmental corporation is often called a municipal corporation. Examples are city, a school corporation, and a sewage district. Such governmental corporations usually, although not always, have the power to tax. They frequently operate mush like business corporations except that they do not seek to make a profit. Examples are the  Tennessee Valley Authority and the  Federal Home Loan Bank.

Nonprofit corporation:

Nonprofit corporations are similarly to non-taxing governmental corporations. They differ, however, in that they are formed and operated by private persons. Examples include hospitals, clubs, and some very large businesses like Blue Cross-Blue Shield Association. Their founders and members are not permitted to make profit from the operation of the corporation, although the officers and employees are paid salaries. Each of the states has a special statute under which nonprofit corporations are to formed and operated.

For profit Corporations:

For profit corporations are by far the most common of the various types. The main aim of such corporations is usually to make a profit that may be distributed to the shareholder’s as dividends. Sometimes, however , most or all of the profits are reinvested in the corporation in order to make the business grow. Then, at a later time, shareholders may sell their stock or the entire business may be sold. In this way, the shareholders receive their profits while paying only the lower capital gains tax rather than an income tax on the retained profits.

For profit corporations are often divided into publicly held and close corporations. The stock of a close corporation is generally held by a small group of people who know one another. Usually some or all of them intend to be active in management. An example is a family owned and operated retail shop. The close corporation can be contrasted with the publicly held corporation, which sells shares to people who often have little interest in it except as investors. General moter corporation is a good example. Of course, most publicly held corporations are much smaller than GM. However , most of the largest corporations are publicly held. In a large corporation with a stock owned by many scattered shareholders, ownership of less than 10 percent of the shares may be enough to control the enterprise.

The right to incorporate:

All business corporations derive their existence from the state in which they are incorporated. The earliest business corporations in the America colonies obtained charters from the King of England, since the colonies were governed by the English Monarch. The constitutional convention of 1797 considered giving this power to the federal government; However no such power was included in the constituition. Therefore, this power was left to the states. To form a corporation , the promoters had to find a legislator who was willing to introduce a bill. The legislature then decided whether to grant a charter.

Early legislatures feared the growth of corporate power. Charters, therefore, tended to be for short periods of time. For example, a charter might have to be renewed after 10 years. The powers granted and the amount of capital  involved  were generally rather limited. Most of the earliest corporations were formed to supply public facilities such as bridges, tool roads, and waterworks. A few, were mining and manufacturing businesses. As commercial and industrial development progressed in the United States, legislature were impressed by the resultant benefits brought to the people and, accordingly, they wanted to encourage corporations. At this time, there was also an expanding belief in greater freedom and equality for all the people. These factors resulted in the passage of general incorporation laws, which made incorporation a right instead of a legislative previlege. Under this  statutes, all that is necessary to form a corporation is to prepare articles of incorporation that comply with the states incorporation statute. If they do- the secretary of state – has a duty to issue a certificate of incorporation.

Deciding where to incorporate:

Frequently the corporation will be incorporated in the state where most of its business will be conducted. However, if the enterprise is conducting its affairs in interstate commerce, the promoters may decide to incorporate in a state other than the state in which the principle offices were located. Many large corporations ‘shop around’ for the state that will offer the most benefits to the enterprise.

Two fundamental considerations  frequently arise when the promoters are trying to decide where to incorporate. First, the business may be incorporated in a state where the incorporation fees , taxes, annual fees, and other charges tend to be lower. Second, the promoters nay decide to incorporate in a state where the corporation statute and judicial decisions grant management considerable freedom from shareholder interference in the operation of corporate affairs. Traditionally, Delaware and , more recently, Ohio, have been attractive states of incorporation.

Steps in incorporation:

The following steps governing the incorporation process are included in the MBCA:

1. Preparation of the articles of the incorporation.

2. Signing and authenticating the articles by one or more of the incorporators.

3. Filing the articles with the secretary of state and paying all required fees.

4. Issuance of the certificate of incorporation by the secretary of state.

5. Holding an initial organizational meeting.


Different states may vary slightly in exactly what they require in order to incorporate: however, the above requirements are included in the corporation laws of most states.

Further, many states require that a minimum of $1000 be contributed to the business before it can receive a certificate of incorporation. Some states have an additional requirement directing that a copy of the articles of incorporation be filed in the country where the corporation has its principle place of business.


1. Law for Business A. James Barnes, Terry Morehead