As discussed in our article Limited Liability Entities, the most common form of joint enterprise in the United States is either a partnership, with unlimited liability, or the safer and more formal entities which do not impose liability on their members. Non profit limited liability entities are also available as Foundations and not for profit corporations.
At times groups of persons wish to join together to accomplish a goal and are either not concerned about personal liability or feel that the activities that are to be undertaken by the group do not warrant the formality of creating a true separate entity. These “groups” are often termed associations and some states give them legal status. This article shall discuss their essential characteristics.
An association is simply a collection of people who have joined together for a certain object or goal. Those same persons could achieve the protection of limited liability by creating a corporation,limited liability company or limited partnership. Instead, the people elect to more simply form an association, usually informally. Such unincorporated associations are generally formed by the action of a number of individuals in associating themselves together under a common name for the accomplishment of some goal (which must be lawful). Pursuant to common law, an unincorporated association is not an entity, and has no status distinct from the individuals composing it. It is a body of individuals acting together in order to carry out of a common enterprise without forming a corporation. As with a general partnership, liability of each of the members for the acts of the others may be imposed. Despite the informal lack of a separate entity, associations usually conduct themselves internally akin to a corporation with officers, bylaws and other rules of action.
Even though unincorporated associations technically do not exist as a legal entity apart from its members, many state legislatures have recognized the separate existence of an association by statute. Therefore, in some jurisdictions, unincorporated associations, by statute, are given the status of legal entities and are empowered to acquire, hold, and transfer property, or to sue and be sued as an entity. As commonly understood, a club is merely an organization or association of persons who meet together for social purposes or some other common goal.
Laws and case law has been passed in some states, including California, setting forth requirements as to the form and manner of execution of articles of association and bylaws of an association or club. Provisions of bylaws of an association or club are valid and binding on the members as long as they are not immoral, illegal, or against public policy.
Generally, the more routine matters involved in governing an incorporated association or club should be placed in the bylaws. Where there is a choice between putting provisions in the bylaws or in the articles, the bylaws will sometimes be chosen because they are not a matter of public record. It should be remembered, however, that while not all provisions may be contained in the bylaws, in most states any provision that may be contained in the bylaws may also be contained in the articles and a provision in the articles is superior to a contrary provision in the bylaws.
Typical examples of such associations are The American Trial Lawyers Association; The National Association of College and University Attorneys; American Civil Liberties Union; Golf Clubs; Yacht Clubs, Yoga Clubs, Running Clubs, Bridge Clubs, etc.
The Articles of Association of the Typical Organization:
Matters that should be considered in drafting the articles of association and/or bylaws for an association or a club are the following:
- Name of association or club.
- Purpose or purposes for which it is formed, e.g., a specific or primary purpose as well as other general purposes.
- Determination of organization as nonprofit or profit.
- Location and complete address of principal office.
- Powers of the association.
- Form of government.
- Names and addresses of first members.
- Titles and numbers of members of governing body.
- Duties of officers.
- Meetings of governing body.
- Quorum requirements for conduct of business.
- Appointment and duties of committees.
- Membership criteria.
- How a person is admitted to membership.
- Suspension or expulsion of members.
- Termination of membership, including provisions for notice and hearing of charges against a member.
- Meetings of association, including the time and place of meetings, the manner of giving notice, and quorum requirements.
- Authorization to adopt bylaws or regulations.
- Manner of amending bylaws or regulations.
- Manner of articles of association.
- Procedure to amend the articles and bylaws.
- Manner of dissolution.
- Distribution of assets on dissolution.
Home Owners’ Associations:
Most cities and towns have zoning requirements that prohibit homeowners from making unrestricted changes to their houses. This keeps people from adding third stories to two-story structures, building three-car garages up to the neighbor’s property line, or simply tearing down a house to make room for two houses on the same lot. Most communities, however, have no power to require homeowners to choose attractive colors for their exterior walls, keep their lawns well-manicured, or repair broken steps or walkways.
For people who prefer a consistently well-kept neighborhood, there are a number of residential options, known as common interest developments (CIDs). The CID (sometimes called a planned unit development) combines the security of home ownership with the convenience of minimal maintenance. Often they provide residents with self-contained communities with shared amenities such as swimming pools, parks, tennis courts, and buildings for community events. Some CIDs have actual single-unit houses, while others had attached houses or townhomes. Oversight of the common areas is the responsibility of the homeowners association, whose responsibilities include maintaining common areas, managing the CID’s budget (residents pay monthly maintenance fees), and ensuring that residents abide by the community’s regulations.
The CID differs from a condominium or a cooperative. The condominium owner owns only the interior space of the unit; the exterior walls are considered part of the common space (and thus are maintained by a condominium owners’ association). In a cooperative, owners hold shares in a corporation that owns the property; each resident actually owns shares that correspond to a specific unit. The cooperative fees pay for building maintenance inside and out. With a CID, the resident owns the entire structure and the land on which it sits. CID residents are thus responsible for the exterior upkeep of their own homes. But the community is responsible for maintaining the common amenities; some also take care of mowing lawns.
The advantages of a CIDs can be a major selling point. According to the Community Associations Institute (CAI), a national advocacy and education group, there were 274,000 association-governed communities in the United States in 2005, with 22.1 million housing units and 54.6 million residents. In contrast, in 1970 there were only 10,000 such communities, with 701,000 housing units and 2.1 million residents. A survey conducted for CAI by polling group Zogby International in 2005 showed strong satisfaction among CID owners. Some 71 percent of survey respondents reported CID living as a positive experience, as opposed to only 10 percent who said it was a negative experience. More than half of respondents said they were satisfied with their homeowners association, and 90 percents said they were on friendly terms with association board members. In addition, 78 percent of respondents said that the association rules and regulations enhanced the CID’s property values.
It is those rules and regulations, known as covenants, conditions, and restrictions (CC&Rs), that make CIDS popular—but CC&Rs are also the basis for many resident complaints and can result in litigation. The CC&Rs generally cover the exterior appearance of each residence and their goal is to create a uniform environment. The difficulty arises when the homeowners association and individual residents have a different idea of what “uniform” actually means. Some CIDs have very general guidelines that allow people to express a certain degree of individuality (landscaping, for example, or exterior paint colors) as long as their homes are well-kept. Other CIDs have CC&Rs that prohibit residents from choosing their own paint trim colors, planting their own shrubs in their front lawn, or even hanging an non-approved color of curtains or blinds in their windows. Often, the CC&Rs are included in the property deeds, which means removing a particular regulation can be time-consuming and cumbersome.
Among the items a typical homeowners association may regulate:
- shingles, siding, and exterior paint
- fences, shrubs, and hedges
- landscaping (what flowers can be planted, for instance)
- swing sets, basketball hoops, and other structures for children
- tool sheds
- home-based business
Thus, one CID may allow residents to plant their own gardens but not to fence off their gardens. Another CID may allow cats or small dogs but not large dogs. Still another might allow children’s swing sets in the back yard but not a basketball hoop in the front.
Along with the CC&Rs, fees are something that can vary considerably. Some CIDs charge a nominal monthly fee to maintain common areas, while others can charge significantly higher fees. In addition, CIDs can levy assessments on residents for major renovations or repairs. These charges can quickly add up, and the fee policy depends on what the CID and the governing association determine it to be. In some cases, residents who either cannot or will not pay required fees can face foreclosure.
Those who want to explore the option of living in a community development should do their homework before they commit to purchasing a home. The need to know what the restrictions are, and they need to know whether they can live with those restrictions.
At times, local government can become involved in resolving homeowners association disputes. For general resident-association disputes, most government agencies are unlikely to get involved. In an information package distributed to CID residents by the State Attorney General’s office in New York, the answer is clear: “In most cases there is no government agency that can help unhappy owners who are having problems with their homeowners association.”
But this does not mean governments are never able to get involved. When homeowners associations clearly overstep their bounds, government does sometimes step in. In June 2005 Colorado passed a measure known as Senate Bill 100, which prohibits homeowners associations from adopting rules that prevent residents from displaying the American flag or political signs. It also limits the availability of foreclosures and requires homeowners associations to give potential buyers a copy of the rules that govern the CID.
One reason government is often reluctant to get involved with these disputes is that often for every one resident who has a complaint about a particular rule there are dozens of residents who value that rule. (The CAI survey results cited above illustrate this.) Many people choose to live in a community that guarantees them a sense of structure and uniformity, because along with structure and uniformity also comes security and peace of mind.
Regardless of the legal standing, most people would say that there is a difference between a resident who inadvertently violates a CID rule and one who deliberately does so. Colorado’s Senate Bill 100 was actually less stringent when it was signed into law than it had originally been. Governor Bill Owens explained that taking too much authority away from homeowners associations ignored the fact that many CID residents had chosen to live there because they wanted a neighborhood with clear regulations.
Clubs As Associations-Liability Issues:
By far the most common participation in associations by the average person is membership in a Golf Club, Tennis Club, Yacht Club, Bowling League, etc. It is important to differentiate between entities that call themselves clubs but are actually also for profit or nonprofit corporations (such as health clubs and Yoga studios and the like), and associations which are more informal organizations that exist for mutual benefit and are not “owned” by third parties making a profit or having control.
The reason our office normally recommends creation of limited liability entities for most associations that are contemplated is to avoid the danger members face of being joined in as parties individually if litigation erupts. That would normally not be the case if a formal entity is created. Such personal liability exposure may not be a critical problem for many associations engaged in limited activities and insurance can often be obtained to cover associations that would bear the brunt of the defense costs of litigation. Nevertheless, there is little question that the additional effort and cost of creating a limited liability entity can certainly create greater security for members’ individual assets. As one client put it, it’s “cheap security.”
If liability is a significant danger for the activities being undertaken, it is also vital to enter into various waivers and contracts with members and the public who may be exposed to harm and obtain written waiver of the right to commence legal action and specify duties and responsibilities. These agreements, if executed and properly drafted, can provide some protection. Better, a limited liability entity, non profit or otherwise, would give additional and more complete protection. See our article on foundations.
The ability of people to join together to accomplish a purpose is one of the cherished rights of Americans. The Freedom of Association is actually mentioned as a constitutional right in the Constitution. Often a quite informal gathering of friends or colleagues eventually morphs into a regular social or charitable activity, be it a bowling league, a church gathering that seeks to help others or a hiking, boating or running club. We sometimes encounter people who resist the idea of formalizing such organizations, often saying that they engage in such activities to avoid the complications and “hassles” that business life requires. The idea of having to formalize a structure, buy insurance, create contracts, and perform the half dozen acts to regularize the organization is anathema to those seeking merely to enjoy themselves.
Such attitudes may exist until the first accident occurs or a dispute erupts among members that can threaten the viability of the entire organization. Without formal rules, insurance, contractual protections and, at times, limited liability entity creation, the relationships can turn ugly, indeed. One group, known to this writer, which sought to publicize writing efforts of disabled children on the internet with small booklets distributed gratis found itself facing a libel action brought against the members individually deriving from a third party convinced that a poem referred to his medical practice. The doctor, well funded and emotional, sought to impose personal liability and while he failed, the two years of expensive litigation truly traumatized several of the members. It could have been avoided or minimized with some “homework” by the organizers but as one of them told this writer in the midst of the turmoil, “Who would have thought handing out little poems from children was a high risk venture?”
Perhaps the best answer was given by an Asian client of our office who once commented, “In the United States, all acts are high risk because you people enjoy your courts far too much.”
That said, some ground work and care can eliminate any significant risk in participating in an organization and the benefits and enjoyment usually far outweigh the difficulties that may be encountered. Just prepare accordingly.