The de facto corporation doctrine provides that a defectively formed corporation . . . may attain the legal status of a de facto corporation . . . . The most important aspect of a de facto corporation is that courts perceive and treat it in all respects as if it were a properly formed de jure corporation.
Duray Development, LLC v. Perrin
Defendant signed two contracts with plaintiff, the first personally and the second on behalf of his LLC, Outlaw. However, Outlaw did not exist yet when the contracts were signed. Defendants did not perform their work satisfactorily or on time, and plaintiff sued for breach of contract.
Trial court found that defendant was in breach of contract owed $96,637.68 in damages to plaintiff.
Are the de facto corporation and corporation by estoppel doctrines applicable to LLCs?
Defendant signed the second contract on behalf of Outlaw. Since all parties treated the contract as though Outlaw was a properly formed LLC, the doctrine of de facto corporation shielded defendant from personal liability. The doctrine of corporation by estoppel also precluded plaintiff from arguing that he is personally liable.
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"Where a body assumes to be a corporation and acts under a particular name, a third party dealing with it under such assumed name is estopped to deny its corporate existence."
All elements of a de facto corporation were present in this case, as the trial court rightly concluded. Thus, if defendant formed Outlaw as a corporation instead of an LLC, it would have been a de facto corporation for purposes of liability on the second contract. There is no precedent that says the de facto corporation doctrine cannot apply to LLCs, so in light of the similarities between the two, it should to prevent inconsistencies in the law.
The corporation by estoppel doctrine also applies to LLCs. LLC by estoppel would prevent the plaintiff from claiming that the LLC did not exist, but this argument was not preserved on appeal, so it cannot be affirmed on this basis.
The de facto corporation doctrine and corporation by estoppel doctrines can apply to LLCs.
Reversed and remanded.