Creating a corporation is one of the most important processes in the development of your business. But what is a de jure corporation vs de facto corporation vs corporation by estoppel? Each is a distinct type of corporation with varying degrees of legal recognition and limited liability protection. The corporate status depends on whether the would-be corporation filed the correct legal documents with the state.
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De jure corporation vs de facto corporation vs corporation by estoppel: what’s the difference?
The short answer is that each type of corporation arises from common law doctrine and provides a different degree of legal powers, recognition by the state, and limited liability protection for the business and its directors. Continue reading below for the precise definitions of each legal entity.
What is a de facto corporation?
De facto corporations have some legal protections, but not the full scope afforded to de jure corporations. For a de facto corporation definition, a state recognizes a “de facto corporation” when its incorporators made a good faith attempt to comply with the state’s incorporation statute, meaning they missed only technicalities.
Essentially, a de facto corporation has met the substantial elements of the incorporation process but hasn’t quite done it in the right way. When this happens, other companies, individuals, and even the state can bring a suit challenging the company’s legitimacy. Perhaps most importantly, corporate owners or those sitting on the board of directors are protected from personal liability.
To be protected from third-party lawsuits, the following conditions must be present:
- The state has an incorporation statute making such legally possible
- The business entity has made a good-faith effort to comply with this statute
- The company proves that it has used at least some corporate privileges
Nonetheless, the state — but not third parties — may still bring a quo warranto proceeding. This occurs when the state challenges an individual‘s right to serve in a corporate position or seeks to revoke a corporate charter entirely.
De facto corporation example
Let’s consider an example of a de facto corporation. One requirement for incorporating in Florida is that the corporation file articles of incorporation with the state’s Secretary of State’s office.
Jennie wants to incorporate a business selling cupcakes to be called “Jennie’s Cupcakes.” She completes all of the statutory requirements (described below) and fills out the articles of incorporation. But instead of filing with the Secretary of State’s office, she files with the Florida Department of Health. Because she substantially complied with the state law, she has a strong case for a de facto corporation. However, she’ll need to consult legal advice to determine how best to make her case.
What is a de jure corporation?
Compared to a de facto corporation, a de jure corporation has obtained a certificate of incorporation from the state. The de jure corporation definition is a corporation that has fully complied with the entirety of a state’s incorporation requirements, meaning the company is a bona fide corporation under state law.
Once a company has gained de jure corporation status, it has greater legal protections under the state’s business laws. For instance, the status of the company cannot be challenged by third parties, other companies, or even the state. In addition, the owners have complete limited liability, protecting their personal assets from bankruptcy in most cases. This status also entitles the corporation to:
- Holding regular board of directors‘ meetings
- Issuing stocks to shareholders
- Conducting business as a corporate entity in the state
Finally, a de jure corporation is one that is formed for a single purpose. When forming your corporation, consider forms such as:
- General partnership
- S Corp vs LLC
- Limited liability partnership
De jure corporation example
To form a de jure corporation, you must comply with the state’s incorporation statute entirely. Corporation doctrine in Florida requires the following steps:
- Choosing a corporate name
- Completing and filing articles of incorporation
- Appointing a registered agent who lives in the state
- Appointing directors and holding board meetings
- Preparing corporate bylaws (optional but recommended)
Let’s look at another example. Now, imagine that Jennie still wants to form a corporation titled “Jennie’s Cupcakes, Inc.” She follows the steps above exactly. This time, she chooses a corporate name by searching Florida’s database to ensure that the name isn’t already taken.
However, she includes the abbreviation “Inc.” as required by the statute. She completes the articles of incorporation, appoints her business partner as the registered agent, and designates a board of directors with a scheduled board meeting. The Secretary of State’s office, therefore, issues a certificate of incorporation.
What is a corporation by estoppel?
The third type of corporation recognized by corporation doctrine common law is the corporation by estoppel. A corporation by estoppel definition is a corporation created by common law doctrine when a company is not properly established under state law, meaning it can’t be de facto or de jure.
This provides limited protection to some officers and shareholders of the company. To assert a corporation by estoppel, the company must prove that the other party assumed that the company was indeed a corporation. Such evidence includes proof of the other party’s conduct. When proven, the other party is estopped, or prevented, from asserting that the company is not a corporation.
Corporation by estoppel example
This type of corporation is a little bit more difficult to understand. Imagine our friend Jennie again. She still wants to form a corporation called “Jennie’s Cupcakes.” However, she fails to include a word like “corporation” or “limited liability corporation” (or appropriate abbreviation) in the name. She also never appoints a corporate agent and fails to file her articles of incorporation.
However, she does appoint a board of directors who adopt a governing set of bylaws. To start her business, Jennie contracts with a vendor for 1000 pounds of baking flour. The vendor is a sophisticated baking goods manufacturer who has been in the business for 20 years. It also has an in-house corporate legal team.
When the manufacturer’s general counsel reviews the order, she notices that Jennie’s company is not properly named — it doesn’t have “corp.” or “LLC” or a similar term. The general counsel also checks Florida’s Secretary of State’s Division of Corporations website to determine whether Jennie’s company is a registered corporation — it isn’t. However, the general counsel decides to agree to the contract anyway.
This course of conduct shows that the manufacturer did business with Jennie’s Cupcakes as if it were a bona fide corporation. Therefore, the manufacturer cannot claim corporation by estoppel.
Need help deciding between a de facto vs de jure corporation vs corporation by estoppel?
Completing the required paperwork to form a bona fide corporation can be tedious and time-consuming. Working with a law firm that has experience in this area can protect you from mistakes during the incorporation process that may open you to liability. At Cueto Law Group, we have the experience necessary to guide you through this process.
Contact us today to get started.
Key Takeaways on the difference between a de jure corporation, de facto corporation, and corporation by estoppel
All three of these entities are different types of corporate statuses. What separates one from the other is the degree to which the person seeking to incorporate the company complied with the state’s incorporation statute. The most legally protected entity is the de jure corporation, which is protected from tort actions challenging the status of the business entity.
