All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting.
(Code 1981, §14-2-204, enacted by Ga. L. 1988, p. 1070, § 1.)
Law reviews.- For article discussing liability of corporate directors, officers, and shareholders under the Georgia Business Corporation Code, and as affected by provisions of the Georgia Civil Practice Act, see 7 Ga. St. B. J. 277 (1971). For survey article on business associations, see 34 Mercer L. Rev. 13 (1982). For survey article discussing developments in law of business associations for the period from June 1, 1998 through May 31, 1999, see 51 Mercer L. Rev. 127 (1999). For comment, "An Empirical Study of Defective Incorporation," see 39 Emory L.J. 523 (1990).
COMMENT
Source: Model Act, § 2.04. While Section14-2-204 is substantially identical to § 14-2-23, it represents a change in Georgia law. Formerly directors remain liable until the corporation is organized, under provisions requiring payment of minimum capital of at least $500 under former § 14-2-154(a)(4). No such organizational steps are a condition precedent to limited liability under the Code.
The Code follows the approach of limited partnership law: that innocent investors who are ignorant of the failure to complete the incorporation process do not become personally liable by virtue of that failure. Thus, where both shareholders and innocent third parties deal on the basis of corporate credit and corporate liability, no public policy requires shareholder liability. Notice of the failure, and continued participation in the business thereafter, would, of course, trigger personal liability.
Cross-References Incorporation, see § 14-2-203. "Person" defined, see § 14-2-140.
JUDICIAL DECISIONS
Editor's notes.
- In light of the similarity of the statutory provisions, decisions under former Civil Code 1910, §§ 2192, 2220, former Code 1933, § 22-204 and former Code Section 14-2-23 which were repealed by Ga. L. 1988, p. 1070, § 1, effective July 1, 1989, are included in the annotations for this Code section.
Common law "promoter's liability" supplanted by statute.
- O.C.G.A. § 14-2-204 requires actual knowledge by persons who engage in preincorporation transactions that there was no incorporation; thus, defendant who entered a contract as president of a corporation before articles of incorporation had been issued was not personally liable for the corporation's alleged breach of contract because the defendant had no knowledge that the articles had not been issued at the time of the contract. Weir v. Kirby Constr. Co., 213 Ga. App. 832, 446 S.E.2d 186 (1994).
Necessity for certificate of incorporation.
- Without a charter (now certificate of incorporation) there is no corporation; and without organization under the charter there can be no corporate act, no corporate property, no corporate liability. Michael Bros. Co. v. Davidson & Coleman, 3 Ga. App. 752, 60 S.E. 362 (1908) (decided under former Civil Code 1910, § 2192).
Agreements between individuals insufficient for incorporation.
- Corporations cannot be created by a mere agreement between individuals; the agreement and association must be authorized and sanctioned by law. Meinhard, Schaul & Co. v. Bedingfield Mercantile Co., 4 Ga. App. 176, 61 S.E. 34 (1908) (decided under former Civil Code 1910, § 2192).
Doctrine of corporation by estoppel.
- The doctrine of corporation by estoppel should not be applied when an individual purporting to act for a nonexistent corporation attempts to escape liability on a contract by defending on the basis of the nonexistent corporation. Don Swann Sales Corp. v. Echols, 160 Ga. App. 539, 287 S.E.2d 577 (1981) (decided under former Code 1933, § 22-204).
Doctrine of corporation by estoppel is inapplicable to transactions occurring prior to issuance of certificate of incorporation. Echols v. Vienna Sausage Mfg. Co., 162 Ga. App. 158, 290 S.E.2d 484 (1982) (decided under former Code 1933, § 22-204).
Incorporators held liable.
- Defendants were individually liable for debts in a case in which plaintiff's agents were repeatedly told by defendants that the entity with which they were contracting was a Georgia corporation but the evidence was undisputed that the corporation had never existed. Kelley v. R S & H of N.C., Inc., 197 Ga. App. 236, 398 S.E.2d 213 (1990) (decided under former § 14-2-23).
Evidence that defendant knowingly signed a lease on behalf of a corporation that did not exist was sufficient to find him personally liable for damage to the lessor's property. Zuberi v. Gimbert, 230 Ga. App. 471, 496 S.E.2d 741 (1998).
Partnership agreement for LLC that was never formed.
- Mortgage corporation was not bound by a partnership agreement executed by the mortgage corporation's sole officers and shareholders as partners of a limited liability company (LLC); as the LLC was never formed, the officers became personally obligated under the partnership agreement. Nationwide Mortg. Servs. v. Troy Langley Constr., Co., 280 Ga. App. 539, 634 S.E.2d 502 (2006).
The plaintiff loaned money to a partnership and, therefore, O.C.G.A. § 14-2-204 did not apply; there was no indication that the plaintiff believed that the business had been incorporated when making the loans or that either of the plaintiff's partners was responsible for incorporating the business. Jamal v. Hussein, 237 Ga. App. 779, 515 S.E.2d 407 (1999).
Mere offer to enter into contract at unspecified future time will not result in personal liability of incorporators when contract was not in fact consummated until after formation of corporate entity. Satellite Syndicated Sys. v. Henderson, 162 Ga. App. 453, 291 S.E.2d 749 (1982) (decided under former Code 1933, § 22-204) Watson v. Sierra Contracting Corp., 226 Ga. App. 21, 485 S.E.2d 563 (1997);.
Mere misnomer does not place individual liability on agent.
- Trial court did not err in denying a hotel's motion for summary judgment and instead granting summary judgment to an agent because the undisputed evidence showed that the agent signed the contract on behalf of a corporate principal, identified in the contract by a misnomer; thus, the agent was not individually liable under the contract. Courtland Hotel, LLC v. Salzer, 330 Ga. App. 264, 767 S.E.2d 750 (2014).
Cause of action when organizers transacted business in company name.
- Although the debtor corporation, chartered in 1923, never received enough capital stock for its organization, the four-year statute of limitations for fraud did not begin to run upon the organization of the corporation, but began to run when a debt was incurred with plaintiff creditor bank in 1927; because no cause of action arose against corporation organizers before they transacted business in its name, a suit brought in 1930 was not barred. Rucker v. Mobley, 178 Ga. 496, 173 S.E. 392 (1934) (decided under former Civil Code 1910, § 2220).
Arranger of telephone service for not-yet-formed corporation.
- An individual who arranged for telephone service on behalf of a corporation that was not yet incorporated was personally liable for all charges, including post-incorporation charges, since the telephone company had not been advised that it was dealing with a newly formed corporation. Korey v. BellSouth Telecommunications, Inc., 225 Ga. App. 857, 485 S.E.2d 498 (1997), rev'd on other grounds, 269 Ga. 108, 498 S.E.2d 519 (1998).
Cited in Cahoon v. Ward, 231 Ga. 872, 204 S.E.2d 622 (1974).
RESEARCH REFERENCES
Am. Jur. 2d.
- 18 Am. Jur. 2d, Corporations, § 119 et seq.
ALR.
- Liability of corporation on contracts of promoters, 17 A.L.R. 452; 49 A.L.R. 673; 123 A.L.R. 726.
Personal liability of person doing business in the name of a dormant corporation, 18 A.L.R. 282.
Signing articles of incorporation as rendering one liable on contracts entered into prior to conclusion of incorporation, 44 A.L.R. 776.
Stockholder's personal conduct of operations or management of assets as factor justifying disregard of corporate entity, 46 A.L.R.3d 428.