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Differences Between De Facto, De Jure and Corporations by Estoppel

            Various small paperwork errors sometimes derail attempts to establish valid corporations. For this reason, there are various terms used to indicate when a corporate charter is in good standing, or perhaps at least partially defective.                                                                                While referencing these sometimes minor formation issues, it’s important to also note that some states refer to the document creating a corporation as its “articles of incorporation,” a “certificate of incorporation,” the “charter” or “the certificate of formation.” The state of Georgia uses the most common term, “articles of incorporation.”

What Does a “De Jure” Corporation Actually Signify?

            This term literally refers to the legality of the entity and indicates that all of the requirements for properly forming a corporation in the state were fully met. Once viewed in this manner, a corporation’s officers are free to hold a board of director’s meeting, issue stock to shareholders and begin conducting business.

The Meaning of the Term “De Facto” Corporation

            This indicates that there is some degree of legal recognition of a corporation, even though its articles of incorporation may not have been filed correctly. To be considered a “de facto” corporation, the parties who tried to establish it must have acted in good faith and must be running their business as a corporation.                                                                                           This common law doctrine was created to try and offer individuals who thought they were running a valid corporation a certain degree of limited liability once they learn that their good faith efforts to establish a valid corporation failed. It’s obviously important to do whatever is necessary to correct the filing or paperwork defects, according to information you can obtain from the state’s Secretary of State Office.

Corporation by Estoppel – What Does this Mean?

            This is another common law doctrine designed to try and offer some degree of protection to the officers and shareholders of a corporation that was not properly established and cannot be considered either a de jure or de facto corporation.  It’s not really one theory but the sum total of various equitable principles designed to preserve fairness.                                                                         The doctrine basically states that when someone has been doing business with an entity in a manner that indicates that it assumed the business was a corporation, it is normally prevented or “estopped” from later denying the corporate status of the company.

General Liability Issues Related to Questionable Corporate Status

            It’s important to note that there’s long been something of a split among courts regarding the potential liability of corporate officers, directors and shareholders when a lawsuit is brought against a corporation that doesn’t neatly fit into any of the categories described above. Long ago, shareholders were more likely to be assigned some degree of liability. However, the more modern approach is to usually only hold certain officers personally liable in lawsuits when they were personally, directly involved in the management of the business.                                       Nevertheless, there are still some rare situations that can arise where actively involved shareholders can still be held liable – particularly when they play key management-type roles in “closed” corporations.

 

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.


Shane Smith
Advocate for the Seriously Injured in Georgia