Before you and your partners incorporate, spell out the terms of the partnership in a pre-incorporation
agreement. Here are the main things you need to consider prior to incorporation.
But before you and your partners incorporate, you should consider spelling out the terms of the
partnership in a pre-incorporation agreement. Here's what you need to know . . .
To the uninitiated, pre-incorporation agreements might seem like a big waste of time. After all, there
is no legal requirement for pre-incorporation documents and most of the content finds its way to the
final incorporation agreement, anyway. But pre-incorporation agreements serve an important role in
clarifying the nature of your corporate partnership and protecting each partner's interests during the
transition to a corporate entity. In certain instances, a pre-incorporation agreement can even reveal
issues that cause one or more partners to withdraw from the process before incurring the hassle and
expense of formal incorporation.
Although details can vary, here are some of the issues your agreement should address:
Name & Purpose of the Corporation
If you and your partners can't agree on the corporation's name and purpose, you have little chance of
succeeding as a corporate business
. The pre-incorporation agreement explicitly states what the corporation will
be called and offers an explanation of its primary activities. Since this
information will influence the corporation's future identity, each partner must
be in complete agreement.
All partners may not share equally in the ownership of the corporation. In fact, it is fairly common for
various partners to own different shares of the corporation based on their investment share and other
factors. The pre-incorporation agreement describes each partner's interest and eliminates any
surprises later on.
Officers and Directors
The incorporation process requires the identification of directors and officers. These names should be
included in the pre-incorporation agreement as well, if for no other reason than it forces you to
identify key figures early in the process.
The initial sources of capital are typically described in the pre-incorporation agreement, including the
names of investors and the amount of capital they will invest in the corporation. The pre-incorporation
agreement may also contain a clause describing each shareholder's responsibility in the event that
operating capital fails to meet operating expenses.
Right of First Refusal
Many corporations reserve the right of first refusal on the transfer of corporate shares. This becomes
particularly relevant when a corporate partner elects to sell his share of the corporation. If partners'
are required to first offer their shares back to the corporation, their ability to pass their ownership
share on to an individual of their own choosing will be limited. However, first refusal rights also serve
to protect remaining shareholders against unwanted ownership interests.
There are several ways a business can choose to incorporate. For example, if the corporation is
planning to be an S-corp for federal and state tax purposes, that information should be specified in the