Answer:<\/strong> Explanation <\/strong> Under common law and corporate law principles, a promoter (Laverne, in this case)<\/strong> who enters into a contract on behalf of a not-yet-formed corporation is personally liable<\/strong> on that contract. This is because a nonexistent entity cannot be bound by, nor ratify, a contract until it comes into existence. Ratification requires the existence of a principal at the time the contract is made, which is not possible before incorporation.<\/p>\n\n\n\n After the corporation is formed, it can adopt<\/strong> the contract made by the promoter. Adoption means the corporation agrees to be bound by the terms of the pre-incorporation contract. However, adoption does not automatically relieve the promoter of personal liability<\/strong>. To relieve the promoter of liability, a novation<\/strong> is typically required\u2014a new agreement between the corporation, the promoter, and the third party (e.g., the seller of the furniture) that replaces the promoter with the corporation as the obligor.<\/p>\n\n\n\n Therefore, Laverne is personally liable before incorporation and remains liable after incorporation unless a novation occurs<\/strong>. The corporation\u2019s later acceptance of the contract may shift performance duties to the corporation, but Laverne remains secondarily liable unless the other party agrees to substitute the corporation entirely.<\/p>\n\n\n\n Assume that Laverne and Shirley decide to form a corporation. Before the incorporation process is complete, Laverne enters into a contract on behalf of the corporation to purchase office furniture and equipment for $20,000. After the incorporation process has been completed, the corporation formally accepts the contract made by Laverne. Is Laverne personally liable on […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-222231","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/222231","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=222231"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/222231\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=222231"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=222231"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=222231"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
Yes, Laverne is personally liable on the contract before<\/strong> corporate acceptance. After the corporation formally accepts the contract following incorporation<\/strong>, Laverne may be released from liability<\/strong>, but she remains personally liable unless the corporation and the third party novate<\/strong> the contract (i.e., substitute the corporation in place of Laverne with all parties’ consent).<\/p>\n\n\n\n
\n\n\n\n
When individuals take steps to form a corporation, they often engage in business activities before the corporation is legally created. In this case, Laverne entered into a contract to purchase office furniture and equipment for $20,000 on behalf of a corporation that had not yet been formed. At the time of contracting, the corporation did not legally exist and therefore had no legal capacity<\/strong> to be a party to the contract.<\/p>\n\n\n\n![\"\"](\"https:\/\/learnexams.com\/blog\/wp-content\/uploads\/2025\/05\/learnexams-banner5-157.jpeg\")
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