I answered the titular question over at Quora, as follows:
“A de jure corporation is ordinarily thought of as one which has been created as the result of compliance with all of the constitutional or statutory requirements of a particular governmental entity. … A de facto corporation, on the other hand, can be brought into being when it can be shown that a bona fide and colorable attempt has been made to create a corporation, even though the efforts at incorporation can be shown to be irregular, informal or even defective.” Harris v. Stephens Wholesale Bldg. Supply Co., Inc., 309 So. 2d 115, 117 (Ala. Civ. App. 1975).
The distinction arises because corporation statutes provide limited liability only to validly formed corporations (i.e., “de jure corporations”). A defectively incorporated business could be viewed as a partnership or sole proprietorship, neither of which confer limited liability on their owners, rather than a corporation.
Defective incorporation was a fairly serious problem decades ago when incorporating a business involved far more technicalities than it does today. Older corporation statutes required compliance with substantial procedural formalities as a condition of incorporation, such as multiple local filings, notice by publication, minimum capital requirements, and the like. It was easy for some minor glitch in the incorporation process, such as failing to file all the requisite documents or failing to do so in all the requisite offices, to prevent the corporation from coming into existence as a legal entity.
The most widely used standard for invoking the de facto corporation doctrine is whether (1) there was a good faith effort to incorporate the business and (2) the putative shareholders carried on the business as though it were a corporation, especially with respect to the transaction in question. In Cantor v. Sunshine Greenery, Inc.,[1]for example, the incorporator mailed articles of incorporation to the secretary of state’s office. The articles were officially filed only after some unexplained delay. In the meanwhile, assuming that the articles had been filed and that the corporation existed, the shareholders entered into a lease on the corporation’s behalf. The lessor had considerable business experience, but did not require the shareholders to guarantee the lease personally. Instead, the lessor knew and expected that the corporation would be responsible for the lease. When the corporation failed to perform, lessor sought to hold the shareholders personally liable. The court held that, because of the delay in filing the articles, the business was not a legal corporation at the time the lease was made. The shareholders’ execution of articles of incorporation, the good faith effort to file them, and the carrying on of business in the corporation’s name, however, justified treating the firm as a de facto corporation. The shareholders therefore could not be held personally liable.[2]
[1] 398 A.2d 571 (N.J.App.Div.1979).
[2] Inactive investors present an even stronger case for invoking the de facto corporation doctrine and are rarely held personally liable for the firm’s obligations. See, e.g., Flanagan v. Jackson Wholesale Bldg. Supply Co., 461 So.2d 761, 765 (Miss.1984)(declining to hold inactive investor personally liable).
