Victor Look, Esq. is a partner at Look Law. In this video he discusses the pitfalls of self-incorporation without legal counsel.
- Defective formation.
- De facto Theory
- Corporation by estoppel
Some of the pitfalls of self-incorporation without legal counsel are as follows. The biggest one really is a defective formation. The reason why people incorporate to begin with or create business entities is to shield them from personal liability. In order to do so effectively, you have to comply with certain statutory of requirements to create what’s called the de jure corporation or de jure LLC. However, if you don’t comply accurately with all of the statutory of requirements, you may still be accorded certain protections under two theories. One of them is called de facto LLC or de facto corporation and the other one is called the corporation by estoppel.
Now under de facto theory, if you’ve made a colorable attempt, meaning you’ve made a good faith effort to comply with the statutory requirements but haven’t and you’ve also operated the business and under the corporate name and exercised corporate privileges, then you’re quote with certain privileges. Likewise with the corporation by estoppel, if a party has been engaging your business entity as a business entity, then they are estopped from treating it as if you’re the person reliable. We have to keep in mind though with corporation by estoppel, you’re really only protected under a breach of contract theory and not for any personal thwarts that may be incurred. And so those are very, very important distinctions that we have to remember.
These are of course some of the pitfalls that you would want to avoid if you wished to self-incorporate.