In the context of business law, a de facto corporation refers to a business entity legally created but not officially registered. It is a corporation that has effectively been created through the behavior of its members but not legally acknowledged by state filing.
When Does a Corporation Become De Facto?
A corporation becomes de facto when its members have taken the necessary steps to meet the criteria established in corporate statutes but have yet to file the required paperwork at the state level. States require that certain measures be taken before the company can be claimed as an organization. Generally, these include establishing a business name, obtaining articles of incorporation, filing a certificate of securities, and getting organized as a corporation.
The Significance of a De Facto Corporation
De facto corporations can still enjoy limited liability protections offered by the state. This means that individual members are not personally responsible for any obligations to the company; instead, they are limited to losses up to the value of their investment. In addition, a de facto corporation may also perform activities such as collecting debt and entering contracts, as long as the company is acting in accordance with state regulations.
Examples of De Facto Corporations
An example of a de facto corporation is common when small businesses first form. People might pool resources and begin trading goods or services without filing any official paperwork. This would constitute a de facto corporation, and in some cases it might be sanctioned by the state if it can be proven that the members intended to form a corporation.
Another example would be if a company in the process of filing its articles of incorporation is already engaged in business transactions prior to officially filing with the state. In this case, the business would be considered a de facto corporation. In all of these examples, the members of the de facto corporation may still have some legal protection against legal liability under the law.
Bottom Line
At its most basic level, a de facto corporation is a business entity that meets the criteria of a corporation set by the state but has yet to register with the state. While it does not have the legal protections of an official corporation until its official filing, it still enjoys some limited legal protections from tort and liability claims.