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BENEFITS OF INCORPORATION

A corporation is a legal entity that exists until it is dissolved. It 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:

  1. 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.
  2.  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.
  3.  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: If your association wants to incorporate, contact us for assistance. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

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