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De Facto Corporation

What Is De Facto Corporation?

A de facto corporation is a business entity that has been operating in good faith as a corporation, with the intent to be a corporation, but has failed to complete some necessary formalities required for legal incorporation under state law.

De Facto Corporation Explained

The concept of a de facto corporation provides a legal remedy for businesses that have made a bona fide attempt to comply with all statutory requirements for incorporation but have inadvertently omitted a step or made a minor error in the process.

Under the de facto corporation doctrine, the courts recognize the business as having the same rights and liabilities as a duly incorporated entity, protecting the owners and shareholders from personal liability to the extent permitted by corporate law.

This recognition is contingent upon the entity making a good faith effort to incorporate, acting as a corporation, and having a legal right to incorporate.

The Term De Facto Corporation in Different Legal Contexts

The relevance of the de facto corporation status can be significant in corporate litigation, especially in disputes where the corporate entity's legal status is challenged to hold the shareholders personally liable for corporate debts or actions.

However, the concept and the criteria for de facto corporation status can vary by jurisdiction, as corporate law is primarily state law in the United States.

Common Misconceptions About the Meaning of De Facto Corporation

One misconception is that any business that fails in its incorporation process can claim de facto corporation status. In reality, there must be evidence of a good faith effort to comply with incorporation laws and some level of public operation as a corporation.

Another misunderstanding is that claiming de facto corporation status provides all the protections and benefits of a legally incorporated entity in all respects; while it offers significant protections, particularly against personal liability, there may still be limitations depending on the jurisdiction and specific circumstances.

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What Is De Facto Corporation?

De Facto Corporation Explained

The Term De Facto Corporation in Different Legal Contexts

Common Misconceptions About the Meaning of De Facto Corporation

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