The corporation by estoppel doctrine is normally used as a defense by individuals who have defectively organized a corporation. In such cases, when the defectively organized corporation enters into a contract, the counterparty might attempt to enforce the contract against the individuals on the ground that no corporation existed at the time of the contract. The corporation by estoppel doctrine provides that if the third party dealt with the defectively organized corporation as if it were a corporation, the third party is estopped from denying the corporation's valid organization.
The basic rationale for the corporation by estoppel doctrine is that the plaintiff who was looking only to the corporation in entering into the contract would, in sense, receive a windfall by having the ability to sue the individuals organizing the corporation merely because of the defective incorporation.
The concept has an ambiguous and overlapping relationship with the de facto corporation doctrine. In most cases, corporation by estoppel will be a second line of defense to the de facto corporation doctrine.