Unincorporated Associations

Although many religious organizations elect to formally create a legal entity such as a corporation. For one reason or another, this is not always the case. As a general rule of thumb, an association is formed once two or more individuals mutually agree to act for a common lawful purpose, whether for profit-making or otherwise.

In General:
Much like other entities, an unincorporated association may adopt rules similar to the bylaws of a corporation. Additionally, the same tax-exemptions available to other entities by the Internal Revenue Codes are usually available to most unincorporated associations provided they meet all of the requirements. In California, an unincorporated association would be considered nonprofit if its governing documents contain the necessary provisions. “Governing document” as defined by the California Corporations code means a constitution, articles of association, bylaws, or other writing that governs the purpose or operation of an unincorporated association or the rights or obligations of its members.

An unincorporated association can act and conduct business in the same manner as the other entity such as a corporation. As an example, an association may, in its name, acquire, hold, manage, encumber, or transfer any interest in real or personal property.

In California, an unincorporated association can file a statement with the Secretary of State indicating the location of its principal office and its designated agent for service of process. In addition, all unincorporated associations, even if organized on a nonprofit basis, are subject to California income tax, until the California Franchise Tax Board grants tax-exempt status.

If an unincorporated association has filed a statement with the Secretary of State designating its principal office in California, the proper county for the trial of an action against the unincorporated association is the same as it would be if the unincorporated association were a corporation and, to determine the proper county, the principal place of business of the unincorporated association shall be deemed to be the principal office in this state listed in the statement.

By far the biggest drawback in conducting business in this manner is the inability to legally separate itself from its members. This arises from the fact that by statute, an unincorporated association is liable for its act or omission and the act or omission of its director, officer, agent, or employee, acting within the scope of the office, agency, or employment, to the same extent as if the association were a natural person.

Generally, a member of a nonprofit association is not liable for a contractual obligation of the association unless: (i) the member expressly assumes personal responsibility for the obligation in a signed writing that specifically identifies the obligation assumed, (ii) the member expressly authorizes or ratifies the specific contract, as evidenced in writing; (iii) with notice of the contract, the member receives a benefit under the contract; (iv) the member executes the contract without disclosing that the member is acting on behalf of the association; of (v)the member executes the contract without authority to execute the contract.

In other words, individual members of an association can be held personally liable for the debts and liabilities of the association as a whole. When entering into a contract under the name of the association for example, whether a member of the association consents to the agreement or not, those who enjoy the benefits may also be liable for performance.

Please see our other related articles

Choosing the Right Business Entity and Entity Formation
Principals and Agents
California Attorney General
Must a Church Apply for Tax-Exempt Status

Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.

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