Imagine: A group of five neighbors decide to turn their backyard into a small organic vegetable garden and name it Perennial Veg Power. Sometimes they like to refer themselves as a “collective” or a “collaborative.” They primarily want to grow and share veggies together. Their association is informal. Though they have considered selling some of their excess veggies to their community, they have not figured out the details of that yet. They like the informality of their relationship and the potential business venture that it may offer. They do not intend to officially incorporate as a business entity (i.e. a partnership or a limited liability company).
Generally, when a group decides to perform some task together without filing any legal paperwork or establishing any formal legal structure, whether they know it or not, they have formed an unincorporated association. In California, unincorporated association is defined as an “unincorporated group of two or more persons joined by mutual consent for a common lawful purpose, whether organized for profit or not.” Corp Code §18035.
Unincorporated associations as well as nonprofit unincorporated associations are governed by Cal Corp. Code §§18000-24001.5. An unincorporated association may, in its name, acquire, hold, manage, encumber, or transfer an interest in real or personal property in California. Corp C § 18105Joint tenancy, tenancy in common, community property do not by themselves establish an unincorporated association, even if co-owners share ownership of the property for a common purpose. Additionally, marriage or creation of a registered domestic partnership does not by itself establish an unincorporated association. Cal. Corp. Code 18035(b)(c) Additionally, unincorporated association does not apply to: (a) corporation; (b) a government or governmental subdivision or agency; (c) a partnership or joint venture; (d) a limited liability company; and(e) a labor organization, labor federation, labor council or labor committee. Corp C § 18055
If the governing principles of an unincorporated association do not define the membership of the association, “member” means a person who, pursuant to the governing principles of the unincorporated association, has a right to participate in the selection of persons authorized to manage the affairs of the unincorporated association or in the development of policy of the unincorporated association, but does not include a person who participates solely as director, officer, or agent of the association. Cal. Corp. Code 18010
Agency Law and Establishing Operational Documents
General agency law applies to unincorporated associations. Cal. Corp. Code does not provide a clear statutory direction giving officers, or members of an unincorporated association implied or apparent authority to act for it. Under general agency principles, an association’s officers and directors must have express or clearly implied authorization or express subsequent ratification of acts performed as agents of the association. This restriction may cause a barrier when dealing with banks and other organizations that require agent’s express authority. This ambiguity has been address to some extent for real property transactions. See Corp C §18115 (specified officers of unincorporated association may execute acquisition, transfer, or encumbrance in real property), Corp C §18120(unincorporated association may record interest in real property). To address this ambiguity, especially relating to financial transactions and agreements, make sure to have your client create an operating document identifying a clear procedure and proper recordkeeping.
Unincorporated Nonprofit Association
If the purpose for the association is to benefit the public some way, and does not include earning a profit, the association’s members have formed an unincorporated nonprofit association. Cal. Corp Code 18020 A nonprofit association may carry on a business for profit and apply any profit that results from the business activity to any activity in which it may lawfully engage. Corp Code 18020 (b) People form nonprofit unincorporated associations all the time; often without being aware of it. For example, if you and several of your neighbors get together to help raise funds to keep your local library branch open, you’ve formed an unincorporated nonprofit association. If an unincorporated charitable nonprofit has less than $5,000 in annual revenues, it may function as a 501(c)(3) without applying for IRS recognition of its status. However, as a practical matter, it may be difficult to obtain contributions without an IRS determination letter officially recognizing the nonprofit as a Section 5010(c)(3) organization.
All unincorporated associations, even if organized on a nonprofit basis, are subject to California income tax, until Franchise Tax Board grants tax-exempt status. An unincorporated association that has tax-exempt status must reapply for exemption if it incorporates. An unincorporated association is nonprofit if its creating document contains nonprofit language. A creating document may be one of the following types of documents: Articles of Association, Bylaws, Constitution, trust instrument or other documents that set forth how the association will operate.
Filing with the California Secretary of State
An unincorporated association may file with the Secretary of State, on a form prescribed by the Secretary of State. Corp C § 18200(a) For general unincorporated associations, the UA-100 form is suggested: http://www.sos.ca.gov/business/other/forms/ua-100.pdf To file nonprofit association with the Secretary of State, UNA-128 form is suggested:http://www.sos.ca.gov/business/other/forms/una-128.pdf The Statement by Unincorporated Association expires 5 years from December 31 following the date of filing with the Secretary of State, unless previously superseded by the filing of a new statement. The fee for filing the Statement by Unincorporated Association is $25.00.
The forms require a statement containing either of the following:
(1) A statement designating the location and complete street address of the unincorporated association’s principal office in this state. Only one place may be designated.
(2) A statement (A) designating the location and complete street address of the unincorporated association’s principal office in this state in accordance with paragraph (1) or, if the unincorporated association does not have an office in this state, designating the complete street address and mailing address, if different, of the unincorporated association to which the Secretary of State shall send any notices required to be sent to the association under Sections 18210 and 18215, and (B) designating as agent of the association for service of process any natural person residing in this state or any corporation that has complied with Section 1505 and whose capacity to act as an agent has not terminated.
(b) If a natural person is designated as agent for service of process, the statement shall include the person’s complete business or residence street address. If a corporate agent is designated, no address for it shall be included.
For more information on unincorporated associations, go to: http://www.sos.ca.gov/business/be/forms.htm
Unincorporated associations, including nonprofit associations, work best for informal, ad hoc situations where people get together to perform a short-term, goal. If the Perennial Veg Power decides to expand either as a for-profit or nonprofit, they will be better protected from liability and other risks as a corporation (i.e. cooperative, limited liability company).