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Associations Should Be Incorporated

| Sep 20, 2013 | Homeowners' Associations |

The vast majority of Associations are incorporated as nonprofit corporations. There are some Associations, however, that are not incorporated. This may be due to oversight or may be intentional in the case of some single-family residence Associations (“HOAs”) and some pre-1990 condominium Associations (“COAs”). COAs formed after 1990 are required by state law to be incorporated. See RCW 64.34.300

Regardless of the reason why an Association is unincorporated, the benefits of incorporation are such that I strongly recommend that all Associations, whether HOAs or COAs, incorporate. It may or may not require a membership vote to approve incorporation, depending upon the provisions of the governing documents (CCRs and Bylaws), but the required vote of either the membership (if required) or the Board members only (if membership vote not required) should be readily obtainable once advantages of incorporation are explained.

The paramount advantage of incorporation is that it serves to limit the personal liability of individual Association members for Association obligations. This so-called “corporate shield” helps protect the personal assets of the Association members in the event that the Association is faced with a large judgment or other legal obligation that it is unable to pay from Association funds. To better appreciate this point, the 1997 Washington Supreme Court case of Riss v. Angel is instructive.

The Riss case involved a dispute between an individual Association member who wished to construct a home on a lot in the community and the Association Board (together with other Association members) who had opposed and rejected the new home plans. This was an unincorporated HOA. The Supreme Court ruled in favor of the member seeking to build and, significantly, awarded a judgment against many individual Association members for damages and attorney’s fees totaling over $200,000.00. There was no insurance coverage for this type of claim, and the Association members were “jointly and severally” liable for the entire judgment – meaning that the judgment could be collected in its entirety from any of the members against whom the judgment was entered.

In contrast, when an Association is incorporated, decisions and actions of the Association can only result in a judgment against the corporation. Such a judgment against the incorporated Association may in potentially result in a community-wide special pro-rata assessment to pay it, but in no event will any individual Association member face the prospect of having to personally pay the entire judgment.

Another potential advantage of incorporation is that only incorporated Associations can hold tile to real estate under Washington law. See Newport Yacht Basin Ass’n v. Supreme Northwest, 168 Wn. App. 56, 74 (2012). Thus, an unincorporated Associations that own or acquire property such as common areas, a resident manager’s condominium unit or an offsite parking area, must place title to the property into a trust or some separate corporation owned by the Association (whose stock would then not be considered real estate.) Such complicated arrangements are often expensive and may create additional tax and other potential liability concerns. This entire issue is avoided by simply incorporating the Association.

A third potential advantage of a corporate Association is that it will have the capacity to borrow funds whereas an unincorporated Association generally does not. The capacity to borrow can be useful, or even essential, for Associations when faced with large unexpected or otherwise unfunded capital improvement/repair costs.

The last advantage I will mention with respect to incorporation is that the Washington corporations statutes can sometimes provide valuable guidance regarding procedural issues and other matters not addressed in either the Association-related statutes (COA and HOA) or the Association’s governing documents. In other words, the laws governing corporations can assist in resolving certain issues that can arise due to gaps in the Association documents thereby eliminating uncertainty and avoiding court proceedings.

Please contact us if your unincorporated Association wishes to consider incorporation. The legal process is not complicated or unduly expensive.