Which statement best describes contracts entered into before a company is incorporated?

• A. The contracts entered before incorporation are not binding on the company, but enforceable against the signatory personally.
• B. The signatory is personally liable; the company is not bound by pre-incorporation contracts.
• C. The company becomes bound by the contract as soon as the signing happens.
• D. The company is a separate entity from incorporation date and is bound by pre-incorporation contracts.

Answer: (A)

The key idea is that before a company exists as a separate legal person, it cannot be bound by contracts. Promoters enter into contracts on behalf of the future company, so the contract is with the person who signed it, not with the company. As a result, the company isn’t bound by those pre-incorporation contracts unless it later adopts or ratifies them after incorporation. Until adoption, the other party can sue the signatory personally for performance or breach.

That’s why the best description is that contracts entered before incorporation are not binding on the company, but enforceable against the signatory personally. The company would only become liable if it explicitly adopts the contract after it comes into existence.