ARTICLES OF INCORPORATION & STATEMENTS OF INFORMATION

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, 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, 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 the 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).)

CID Statement of Information 

All common interest developments are required to file statements of information with the Secretary of State. As required by Civil Code § 5405, every association, whether incorporated or unincorporated, must file Form SI-CID with the Secretary of State biennially (every other year) in July. In addition, if the street address of the association's onsite office or the street address of the responsible officer or managing agent of the association changes, the association must file a completed statement within 60 days of the change. The CID statement requires the following information:

• Address of the association's onsite office or, if none, the responsible officer or managing agent of the association;
• Address and daytime telephone number or e-mail address of the association's president.
• Type of common interest development and number of units.

Corporate Statement of Information

As required by Corporations Code § 8210, incorporated associations must additionally file a Statement of Information Form SI-100 with the Secretary of State within 90 days after filing its original articles of incorporation and biennially after that during the applicable filing period. Failure to file this statement by the due date may result in the assessment of a penalty. The penalty for domestic nonprofit corporations is $50. Corporate statements require the following information:

• Names and business or residence addresses of the association's president, secretary, and treasurer.
• Address of the association's principal office.
• Agent of the corporation for service of process.
• The name, if any, of the association's managing agent and whether or not the agent is certified.

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 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.)

Suspended Corporations

Most associations are incorporated. An association's corporate status can be suspended if it fails to perform certain acts described below. Associations can have their corporate status suspended for the following reasons:

• Failure to file tax returns (Rev. & Tax Code § 23301.5) 
• Failure to pay taxes (Rev. & Tax Code §§ 23301) 
• Failure to file a "Statement by Domestic Nonprofit Corporation" with the Secretary of State every two years--every odd year or every even year based on the year of initial registration (Corp. Code § 2205.)
• Failure to biennially file a "Statement by Common Interest Association" with the Secretary of State (Corp. Code § 2205)

To check your association's status, see the Secretary of State's website. 

Consequences of Suspension

A suspended association does not cease to be an association but, instead, is no longer in good standing to do business in the state. (Timberline, Inc. v. Jaisinghani (1997) 54 Cal.App.4th 1361.) Suspension means:

• Corporate Name. An association could lose its corporate name if someone reserves its name during the suspension period. (Boyer v. Jones (2001) 88 Cal.App.4th 220.) If an association loses its corporate name while suspended, it can no longer simply file a form with a new name. The Secretary of State now requires membership approval. That means further delays and additional expenses holding an election before the corporation can be revived.
    
• Litigation. An association cannot initiate lawsuits or defend itself against lawsuits. Attorneys who engage in litigation for an association, knowing it has been suspended, can be sanctioned by the courts (Palm Valley HOA v. Design MTC.) However, a trial court could grant a continuance to permit the corporation to secure a reinstatement. (Schwartz v. Magyar House, Inc., 168 Cal.App.2d 182; Traub Co. v. Coffee Break Service, Inc., 66 Cal.2d 368.) Moreover, the association's insurance company cannot appear, answer, or defend the association in litigation if the association's corporate status has been suspended. However, it could intervene in the case, becoming a party in its own name. Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2006) 136 Cal. App. 4th 212. While the association is reviving its corporate status, it can seek a stay of litigation proceedings. U.S. v. 2.61 Acres of Land (9th Cir. 1985), 791 F.2d 666, 672; Color-Vue v. Abrams (1996), 44 Cal.App.4th 1599, 1606.
   
• Contracts. An association loses the right to enforce contracts (Rev. & Tax Code § 23304.5). Contracts entered into by a suspended corporation are voidable by the party entering into the contract with the suspended corporation but not voidable by the suspended corporation. (Rev. & Tax Code § 23304.1(a)); see also Performance Plastering v. Richmond Homes of California, Inc. (2007) 153. Cal.App.4th 659, settlement agreement entered into by suspended corporation was not void only voidable, and the suspended corporation must be given reasonable opportunity to cure the voidability.)
   
• Tax Returns. Suspended corporations lose the right to get an extension to file tax returns.
   
• Additional Taxes. In 2013 the Franchise Tax Board (FTB) began revoking the exempt status of a corporation once the entity is suspended. If the revocation occurs for a past tax year, the FTB will impose the annual minimum tax of $800 per year plus penalties and interest. To revive the entity, the association must file a new exemption application (Form FTB3500) with the Exempt Organization Unit of the FTB. The application, which used to be five pages, is now twenty-five. Along with the application, the association must file a copy of the endorsed articles of incorporation, executed bylaws, and recorded CC&Rs, and it requires five years of HOA financial information.
   
• Possible Dissolution of Corporation. If an association fails to revive its corporate status, the Secretary of State can administratively dissolve any corporation that has been suspended for at least 48 months. (Corporations Code §§ 5008.9, 6610.5, 8610.5, and 9680.5; Revenue & Taxation Code § 23156.) Dissolution could have a significant financial impact on an association because the cost to reincorporate is much greater than simply reviving the corporation.

Continuing Duties During Suspension

Being suspended does not mean an association is relieved of its obligations. While the association goes through the revivor process, boards should continue:

• holding board meetings;
• making repairs;
• paying bills; and
• conducting annual meetings.

Reviving Suspended Corporation

The following steps must be taken to revive an association's corporate status:

• Franchise Tax Board Suspension. (i) file all past due tax returns, (ii) pay all past due taxes, (iii) pay all penalties and fines, and (iv) file an application for "Certificate of Revivor."
• Secretary of State Suspension. (i) file missing Statements of Information with the Secretary of State, (ii) pay filing fees and penalties, and (iii) file an application for "Certificate of Revivor."

Revival Effect on Decisions. Decisions made and actions taken during suspension are ratified by reinstatement. (Peacock Hill Assn v. Peacock Lagoon.)

Determine Corporate Status. Associations can check their corporate status by typing in their name in the Secretary of State's website. To find out why an association has been suspended, contact the Secretary of State's office and the Franchise Tax Board:

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.