QUESTION: Our association was not originally set up as a corporation. Is there any reason for us to incorporate?
ANSWER: Yes, there is sufficient value to incorporation that all new common interest developments in California are automatically incorporated when created.
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.
ASSISTANCE: If your association wants to incorporate, contact us for assistance. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.