Answer to Question #186180 in Law for Bornface Kandunda

Question

Why would a company enter into a pre-incorporation contract? Give an example. (5 marks) 

Answer 1

Why would a company enter into a pre-incorporation contract? Give an example.

Pre-Incorporation contracts establish the operations, management and define who will have control before the initial corporate meeting.

Also, several business owners draft a group of documents (the confidentiality agreement and the shareholders' agreement) along with the pre-incorporation agreement. These documents can assist in guaranteeing no surprises upon establishing the company. Since the Corporation is not established yet, the pre-incorporation agreement will grant power to its incorporators. For instance, suppose Neisa Bookstore, Inc.s' statement of purpose is "to operate a bookstore," the company has implied powers to conduct all acts necessary to operating a bookstore. These operations could include advertisements, hiring employees, and leasing trucks.

Besides, existing and potential business owners consider entering a pre-incorporation contract for reasons such as liability protection, more attractiveness for raising capital, tax advantages, and less complex transfer of ownership.