The company in formation

The company in formation

In the process of incorporation of a capital company or the company in formation, which usually takes a long time, there is never a strict chronological correspondence between the execution of the public deed of incorporation and the registration of the new company.

For this reason, the law establishes a special regime to which the acts and contracts that may be entered into on behalf of the company in the period between the execution of the public deed and the registration of the company are subject, in these cases we speak of a “capital company in formation”.

What is a company in formation?

The company in formation is, so to speak, a “quasi type” of company which is individualized in the process of incorporation of capital companies and which comprises, temporarily and temporarily, solves the problems of legal certainty derived from the performance in the traffic of a capital company not yet legally incorporated in the absence of its registration, thus making it possible for the commencement of operations to take place prior to that moment without detriment to the interests of third parties and of the company itself.

In this temporary and transitory legal regime, the general rule imposes joint and several liability on those who enter into acts and contracts on behalf of the company prior to its registration in the Commercial Registry.

When the administrators, already designated in the deed of incorporation, or anyone who at the same time as the deed of incorporation had received power of representation from the company, act on behalf of the company prior to registration, entering into relations with third parties, the liability corresponds in principle, solely and in a personal capacity, to those who have intervened in the act or business, without compromising, therefore, the company or the corporate assets (art. 36 LSC).

This does not, however, prevent the company, once registered, from taking over these acts and contracts entered into in its name during the founding phase (art. 38.1 LSC), in which case the personal and joint and several liability of those who entered into them will be extinguished (art. 38.2 LSC). Nor does the fact that this is the general rule mean that the legal regime does not contemplate other provisions.

Legal capacity of company in formation

There are, in fact, several cases in which the company in formation is recognized as having full legal capacity to bind itself, without the need for subsequent ratification of the act or contract, and in which the liability would correspond to the “company in formation” itself with the assets that at that stage would have been incorporated in its name (art. 37.1 LSC).

These provisions refer to (i) the obligations that are legally indispensable for the registration of the company (deed expenses, settlement of taxes, etc.), and (ii) all those acts and contracts that the administrators or any attorney-in-fact may perform when they are expressly authorized to act prior to registration, either in the deed of incorporation or by virtue of a “specific mandate” of all the partners.

Apart from these cases, when the date of commencement of corporate operations coincides with the date of execution of the deed, the rule -unless the deed itself or the bylaws provide otherwise- is that “the administrators are empowered to fully carry out the corporate purpose and to perform all kinds of acts and contracts” (art. 37.3 LSC).

This recognition presupposes the existence of a company, although not yet with the character of a corporation, limited or limited by shares, whose legal personality as such has not been created; that is, the existence of a personified organization with full capacity to act immediately in the traffic and to assume legal relations before third parties. A corporation exists, but not with the personality and characterization of a corporation, limited liability company or limited joint-stock company.

In any case, and as a rule to correct a possible lack of equity coverage, the partners are obliged to respond personally up to the limit of what they have been obliged to contribute (art. 37.2 LSC), in the same way that to guarantee that at the time of registration the capital of the company is backed by adequate equity coverage, the founding partners are obliged to cover any losses that the company’s assets may have experienced due to the acts and contracts entered into during this period of formation (art. 38.3 LSC).