The "de facto corporation" concept is a doctrine that allows a court to treat a defectively incorporated corporation as if it had been properly incorporated in some circumstances.
The doctrine most often applies when individuals have purported to enter into a contract on behalf of a corporation, when in fact no corporation existed because of failure to follow a statutory formality. In such cases, the other party will often try to hold the individuals liable on the contract on the ground that someone has to be liable on the contract, and the corporation was not in existence. The individuals will often defend on the ground that there was a "de facto corporation," and therefore they should not be individually liable.
The test was (1) a valid law under which the corporation could be incorporated, (2) a good faith effort to incorporate, and (3) actual use of the corporate franchise. A common example of good faith is when the corporate organizer has been told by an attorney the articles of incorporation have been filed, but because of some clerical error they actually have not. If the test for de facto corporation was met, the corporation was treated as if it were validly incorporated, preventing creditors from asserting claims against individuals on the ground of defective incorporation.
The de facto corporation doctrine is often described in the past tense, because the Model Business Corporation Act (MBCA) has purported to eliminate the concept twice, in its 1950 version and its 1969 revision, although it opened the door to de facto corporations again in the 1984 revision. This is because the doctrine originally arose when the incorporation process was more difficult and fraught with potential for failure. The MBCA thinking was that incorporation had become so simple by 1969 that there was no possibility to fail to incorporate in "good faith," the second prong of the de facto corporation test. Some states have followed the lead of the 1969 version and eliminated the doctrine of de facto corporation.
The 1984 revision of the MBCA makes whether the participants "know there was no incorporation" the test for liability. Section 2.04. The Official Comment suggests that if the participants "erroneously but in good faith" believe the corporation has been validly incorporated, they will escape liability for the obligations of a defectively incorporated corporation.
The concept of "de facto corporation" should be distinguished from the concept of a "de jure corporation," which is a corporation that has complied with the procedural requirements and is therefore a valid legal entity. It should also be distinguished from the overlapping and similar concept of corporation by estoppel.