Unincorporated Associations. Legally, associations may be incorporated or unincorporated. (Civ. Code § 4800.) An unincorporated association has a legal existence separate from its membership, meaning it can be sued in the same way an incorporated association can be sued. (White v. Cox (1971) 17 Cal.App.3d 824.) In addition, as a separate entity, an unincorporated association owes a duty of care to its members. (Ritter & Ritter v. Churchill.) By statute, unincorporated associations may exercise all the powers of incorporated associations (Civ. Code § 4805), including the power to initiate and defend litigation. (Civ. Code § 5980.) The powers of a corporation are defined in Corporations Code § 7140.
Forming an Association
To form an association, all that is needed is a recorded declaration of covenants, conditions, and restrictions (CC&Rs) against all lots in the development. If there are no common areas, the CC&Rs form a non-Davis-Stirling deed-restricted development. To create a Davis-Stirling association, there must be common areas that make it a common interest development (CID). Each form of development can either be incorporated or unincorporated. In the 1960s and 70s, most developments were unincorporated. Now, most associations are incorporated. To incorporate, an association must file articles of incorporation with the Secretary of State, adopt bylaws, and then file statements of information with the State.
Content. Articles of Incorporation are only a few pages long and (i) identify the corporation as an association formed to manage a common interest development under the Davis-Stirling Common Interest Development Act, (ii) state the business or corporate office of the association, and (iii) state the name and address of the association's managing agent, if any. For more information, see Sections 7130-7135 of the Corporations Code.
Amending Articles. Articles of Incorporation may be amended as provided for in the amendment provision contained in the Articles. For more information about amending Articles, see Sections 7810-7820 of the Corporations Code.
Corporate Seal. The corporate seal is often lost because of frequent board turnover and informal record-keeping of many associations. If that occurs, there is no need to replace it. Incorporated associations are not required to have a corporate seal. Contracts signed by boards do not need a corporate seal to be valid. (Corp. Code § 7140(a).)
Benefits of Incorporation
Unincorporated associations will frequently incorporate to establish the authority of a corporation (Corp. Code § 7140) as well as the protections offered by corporate status. A corporation is a fictitious person and is given the same rights and obligations as a natural person. Because of its legal structure, it offers personal liability protection to its members. Most homeowners' associations are incorporated as nonprofit mutual benefit corporations. Even though they are nonprofit, they must file tax returns each year. Following are some of the benefits of incorporation:
- Procedural Guidelines. Although unincorporated associations have all of the management powers of an incorporated association, they still lack certain benefits and protections given to incorporated associations. Corporations are well-recognized and understood. They have the Corporations Code and case law, providing procedural guidelines and protections not afforded to unincorporated associations.
- Liability Protection. Incorporation offers clearer protections against the membership's vicarious personal liability in contract and tort actions against the association. Because the cost of incorporation is minimal and protections can be significant, incorporation is usually preferable.
- Bank Loans. Associations will occasionally need to finance a large repair project in the common areas. Banks readily lend to incorporated associations, but unincorporated associations will have more difficulty.
Incorporating an Association. An unincorporated association can change its legal status and become incorporated. (Corp. Code § 7121.)
Nonprofit Designation
Associations are primarily nonprofit mutual benefit corporations under the IRS Code as a 501(c)(4) or a 501(c)(7) organization.
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