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What Is an Unincorporated Nonprofit Association?

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Question: What Is an Unincorporated Nonprofit Association?
Answer:

Many so-called nonprofits are simply groups of people who come together to perform some social good. These informal groups are called unincorporated nonprofit associations.

An unincorporated nonprofit association may be subject to certain legal requirements, even though it hasn't filed for incorporation under its state's incorporation laws.

For example, an unincorporated association will generally need to file tax returns, whether as a taxable or tax-exempt entity. Additionally, there may be state registration requirements.

There may also be multiple state and local registration requirements no different from a similar nonprofit corporation, such as charitable solicitation registration, out-of-state qualifications to do business, and local business registration.

Recommended registrations to provide legitimacy include registering with the Secretary of State even if not required, and administrative steps that trigger other registration requirements (for instance, applying for an Employer Identification Number (EIN) to open a bank account).

There are however generally minimal legal requirements with respect to corporate formalities and governance under state law.

The Disadvantages to being an Unincorporated Nonprofit Association

Members of an unincorporated nonprofit association may be exposed to personal liability for the obligations of the association if state laws do not explicitly provide for limited liability (e.g., California provides for limited liability with respect to members of an unincorporated nonprofit association).

Regardless, the law is still less certain regarding personal liability as compared to corporations. Therefore, an unincorporated association may not be ideal if the group's activities create heightened concerns about contract or tort liability (two common areas where liability issues arise), or if potential members, board members, and supporters would be deterred by such concerns.

Generally, an unincorporated association can operate as a tax-exempt nonprofit as long as the purpose of its activity is of public benefit, and annual revenues are less than $5,000. It can even provide contributors with a tax deduction for their donations.

An unincorporated association can also apply for federal tax-exempt status under 501(c)(3) (see Form 1023 Instructions). However, practically speaking, the group may want to seriously consider incorporating at that point especially because the IRS will want to see certain documents even if not required by state law (for instance, organizing documents), and will also be checking for common governance issues such as compensation practices and conflict of interest procedures.

Without a determination letter from the IRS, it may be difficult to get donations and almost impossible to get grants. It may also be difficult to enter into contracts with some other entities (e.g., too many risks for the other party without more extensive due diligence). The group will also need to check the requirements for obtaining tax-exempt status on the state level.

Although there may be no need to file for tax-exemption under 501(c)(3), if the association has annual gross receipt of normally not more than $5,000, it must still annually file Form 990-N with the IRS.

Associations may also claim tax-exemption under other categories (e.g., a 501(c)(4) or 501(c)(6) don't need to apply for federal exemption even if income exceeds the $5,000 threshold).

Unincorporated nonprofit associations work best for informal, ad hoc situations where people get together to perform some sort of community service or raise funds for a particular, and usually short-term, goal. If an organization is not ready to file for 501(c)(3) status from the IRS, an alternative may be to seek a fiscal sponsor.

Be sure to consult these IRS publications:

Suggested resource: Unincorporated Nonprofit Associations and More - Nonprofit Law Blog

Note: This article incorporates information provided by Emily Chan of the Nonprofit Law Blog. It is not intended to be legal advice. It is advised that you consult your own attorney in regard to your specific situation.

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