Asked by Jacob Murphree on Jul 17, 2024
Verified
John is the promoter of Wheelies Corp. ,an automotive wheel manufacturing business.To escape personal liability on preincorporation contracts,John planned to make only nonbinding preincorporation contracts.He made one such contract in March 2011 with his friend David for supplying Wheelies with auto parts.After getting payment for the contract,David refused to make the supply.Wheelies has not been incorporated yet.Is David liable?
A) No,David is not liable because John is not liable on the contract.
B) No,David is not liable because Wheelies has not been formed yet.
C) Yes,David is liable to Wheelies but not to John.
D) Yes,David is liable to both John and Wheelies.
Nonbinding Preincorporation Contracts
Agreements made on behalf of a corporation before it is legally formed, which typically do not hold the corporation responsible once it is established.
Personal Liability
The state of being legally responsible for the debts or actions of oneself, not shielded by corporate or other legal entities.
Incorporated
A legal status indicating that a business entity has been registered as a corporation, separating its liabilities and assets from those of its owners.
- Perceive the commitments of promoters and incorporators regarding preincorporation contracts and those made after the company has been incorporated.
- Understand the duties of promoters before a corporate entity is established and the scope of their financial responsibility.
Verified Answer
PR
PurpleHaze RozayJul 23, 2024
Final Answer :
A
Explanation :
Only when the promoter is liable on the preincorporation contract is the other party liable on the contract.This means that since John is not liable on the non-binding preincorporation contract,neither is David.
Learning Objectives
- Perceive the commitments of promoters and incorporators regarding preincorporation contracts and those made after the company has been incorporated.
- Understand the duties of promoters before a corporate entity is established and the scope of their financial responsibility.