De Facto Corporation Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of De Facto Corporation, written in plain English, along with examples of how it is used.
What is De Facto Corporation?
a term used by court to describe a business establishment which is NOT a corporation by law but shall be treated as one say for example to protect the rights of shareholders.
History and Meaning of De Facto Corporation
A de facto corporation is an entity that is treated as a corporation by the courts, despite not having met all of the legal requirements to be officially incorporated. This legal term comes from the Latin phrase "de facto," which means "in fact."
The concept of a de facto corporation can be traced back to English common law, which recognized that a business that had acted under the assumption that it was incorporated, and had been recognized as such by the public, should be treated as though it was incorporated. This idea was later codified in American law as a way to protect the rights of innocent third parties who had dealt with the business as though it was a corporation.
In order for a de facto corporation to be recognized, it must meet certain criteria. The business must have made a good faith attempt to incorporate, must act in a way that is consistent with being a corporation, and must have acted in a way that would have led reasonable people to believe that it was a corporation.
Examples of De Facto Corporation
Here are a few examples of how the term "de facto corporation" might be used in different contexts:
A group of individuals start a business and file paperwork to incorporate, but due to a mistake on their part or on the part of the government, the paperwork is not completed properly. Despite this, they continue to operate as though they were a corporation, and the courts later recognize them as a de facto corporation.
A business operates for years without realizing that it never officially incorporated. When the issue is discovered, the business seeks to become incorporated, but in the meantime, it is treated as a de facto corporation by the courts.
An individual or group starts a business and intentionally skips the steps required to become officially incorporated. Despite this, the business holds itself out to the public as a corporation, and the courts later recognize it as a de facto corporation.
Legal Terms Similar to De Facto Corporation
Here are a few related legal terms:
- Corporation by Estoppel: A similar concept to de facto corporation, where a business that holds itself out to be a corporation can be held liable as though it were one.
- Ultra Vires: A Latin term meaning "beyond the powers," referring to actions taken by a corporation that exceed its legal authority.
- Piercing the Corporate Veil: An action that allows shareholders or others to hold the owners or managers of a corporation personally liable for the corporation's actions.
- Limited Liability Company (LLC): A type of business entity that combines aspects of a corporation and a partnership, allowing the owners to avoid personal liability for the company's debts and obligations.
- S Corporation: A type of corporation that meets certain legal requirements and elects to be treated as a pass-through entity for tax purposes, allowing the income of the corporation to be taxed only at the individual level.