The Role Of Promoters In Forming Startup Organizations


Promoters are Important Individuals to Startups

Often times when startup organizations are formed, a promoter is appointed to form the Startup to organize it and find investment for its initial needs.   It is important to understand as the roles of promoters in the business world.

Role of The Promoter

For some corporations, usually the smaller ones, the promoters typically become the incorporators, shareholders, officers, and directors of the new corporation.  The purpose of the promoter is to set up the corporation and establish it.  For example, the promoter will typically obtain and manage the initial financing of the corporation; arrange a meeting of potential investors; negotiate and prepare the pre-incorporation agreements; find office and factory spaces; complete all relevant paperwork for leases; and contract for any initial needs of the startup company.

Promoter’s Relationship to the Corporation

When individuals undertake the task of performing the initial steps to form a corporation, they will owe the corporation certain duties.  Promoters stand in a fiduciary relationship to the corporation, and to any stockholders of the corporation.  For example, the promoter has a fiduciary to avoid self-dealing. This is also known as the duty of loyalty.  This duty can arise when the promoter is looking to close a real estate deal for the business’ location.  The promoter cannot choose a better deal for his own furtherance and disadvantage the startup business in some way.

Additionally, the promoters have a duty to disclose certain information to the startup business.  The duty to disclose is satisfied in circumstances in which the promoter discloses the cost and manner to acquire certain assets to an independent board of directors of the startup company and the board approves the transaction.  In cases where such fiduciary duties are breached, the promoter can be sued and held liable.  In a potential action against the promoter for his or her breach of fiduciary duty of loyalty, the startup company may either avoid the transaction at issue or hold the promoter liable for the obtained profits and costs to the startup.

Promoter’s Liability for Pre-Incorporation Contracts

As a general rule, the promoter is typically personally liable on any contract he or she enters into on behalf of the startup company, unless the startup company expressly or implicitly adopts the contract after formation.  Even after the startup company is formed, a startup does not automatically assume a contract and release the promoter from liability – instead, there must be an express agreement for the startup to assume the contract.

Contact your San Jose Startup Company Business Lawyer Today

Because promoters have important duties, tasks, and personal liability, it is important to consult with your experienced business lawyer at Startup Company Counsel today to discuss all these important issues before and after formation of your startup company.  Please call our office at (408) 441-7555 or email us today.

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