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 is no common area, the CC&Rs form a non-Davis-Stirling deed restricted development. To form a Davis-Stirling association, there must be common area, which makes 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 and 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.
Filed with State. Articles of Incorporation are filed with Secretary of State.
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. Because of the frequent board turnover and informal record-keeping of many associations, the corporate seal is often lost. 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 so as 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 are still required to file tax returns each year.
Unincorporated Associations. Legally, associations may be incorporated or unincorporated. (Civ. Code § 4800.) An unincorporated association has a legal existence separate from its membership, which means it can be sued in the same way that 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 of 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.
Benefits of Incorporation. 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, both of which provide procedural guidelines and protections not afforded 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 from time-to-time need to finance a large repair project in the common areas. Banks will readily loan to incorporated associations. Unincorporated associations will have more difficulty.
Incorporating an Association. An unincorporated association can change its legal status and become incorporated. (Corp. Code § 7121.)
Suspended Corporations. Maintaining an association's corporate status is important. (See reasons for suspension.) To check your association's status, see the Secretary of State's website.
Taxes. Both incorporated and unincorporated associations are required to file tax returns. An unincorporated association is treated the same as a corporation for tax purposes. An unincorporated association is not subject to the $800 minimum corporate tax. However, incorporated associations can have the franchise tax waived. Corporations in California pay an annual franchise fee of $800 for the privilege of doing business in the State. However, associations that are nonprofit mutual-benefit corporations qualify for an exemption from that annual fee under Revenue & Tax Code § 23701t if they file for the exemption.
In some instances, the exemption may be retroactive, resulting in a refund of prior payments. If taxable income is less than $100, a California corporate return is not necessary.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.