Transferring an existing business to a corporate form

NEPA

Transferring an existing business to a corporate form:
Whether the corporation is formed before or after the beginning of business operations does not affect the six corporate characteristics as between the owners and managers, but it can have an effect on the relationship of these persons to third parties. This can occur in several ways: (1) Those responsible for the pre-incorporation acts will generally remain liable unless released by the persons with whom they did business; (2) the corporation will not be responsible for the pre-incorporation acts unless it agrees to be responsible or is held by law to be so responsible. In order to make such a transfer, two steps must be taken. First, the corporation must be formed in accordance with the laws of its state of incorporation, and second, the assets of the pre-incorporation business must be transferred to the corporation. In order to effectuate this transfer, the consent of all of the owners of the pre-incorporation business must be obtained, otherwise the transfer may be blocked. A contract made by the owners of an unincorporated business which provides that, subsequent to the beginning of business, a corporation will be formed and the assets and business then existing will then be transferred to the corporation, is enforceable so long as the incorporation is done lawfully, and the corporation is created for the purposes described in the agreement. In many instances, the corporation will replace the preexisting business, which will then be terminated and dissolved. Its business will then be carried on by the corporation. If this is the case, it is important that all third parties with whom the preexisting business had dealings are notified of the transition.

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