By Jones Osborn II

Suppose you're starting a new business venture. Maybe it's just a single real estate deal, or maybe it's a regular operating business. In either case, you will need to sign some contracts to get the venture going. Perhaps you will be buying property or leasing space, or maybe ordering supplies and equipment. Whatever it is, you wisely plan to sign all contracts in the company's name to avoid personal liability.

Your intention is to organize the new venture as a corporation or limited liability company. This makes good business sense. Changes in the law over the last few years have made both the general partnership and the limited partnership obsolete for most purposes. A corporation or a limited liability company can furnish protection against personal liability without double taxation or other income tax problems.

So far, so good. There's only one catch. You have to get the organization legally formed before you sign any contracts. If not, you could have exactly the kind of personal liability you were trying to avoid.

Limited liability companies and corporations are not legally formed until the proper papers have been filed with the state. Unless and until this is done, the company does not exist. This means that any contracts you sign in the company's name will be your personal responsibility. This is so even if you sign as "John Doe, on behalf of the ABC Corporation," or in some similar fashion. This personal liability will not terminate later after the company is formed, even if the company expressly assumes the obligation. If the later company fails, you could be left holding the bag for any contracts you signed before the company's legal existence began.

Exceptions. That's the general rule. There are some exceptions, however. For example, under the Arizona Corporate Code it appears that you would not be liable if you signed on behalf of a corporation without actual knowledge that the corporation did not exist. On the other hand, there appears to be no such exception for limited liability companies -- if you sign for a limited liability company thinking that it exists, you are personally on the hook if it turns out that it isn't.

Another exception to the general rule is that you can expressly provide otherwise in the contract. For example, you can provide that the contract is being signed on behalf of a company to be formed, and that after it has been formed and has adopted the contract, the signer will be released from personal liability. In some cases it is also possible to escape liability if it can be shown that both parties to the contract intended the signer to be released after the company was formed -- but this is difficult to prove unless it is expressly stated in the contract and should not be relied on.

Conclusion. If you are signing a contract on behalf of a new company, make sure the company has been validly and legally formed. If you know it has not yet been formed or are not sure, put a provision in the contract that you are signing on behalf of a company "to be formed." Also state that as soon as it has been formed and has adopted the contract, you are released from all further personal liability.