Associations may be incorporated or unincorporated. An unincorporated association has a separate legal existence from its membership and can be sued in the same way that an incorporated association can be sued. As a separate entity, an unincorporated association owes a duty of care to its members.
By law, unincorporated associations may exercise all of the powers of incorporated associations, including the power to initiate and defend litigation. The powers of a corporation are defined in California Corporations Code Section 7140. Following are some of the benefits of incorporation:
- Although unincorporated associations have all of the management powers of an incorporated association, they do not offer certain benefits and protections provided to incorporated associations. Corporations are well-recognized and understood by attorneys and courts. They have the California Corporations Code and extensive case law, both of which provide procedural guidelines and protections not afforded unincorporated associations.
- Incorporation offers clearer protections against the membership's vicarious personal liability in contract actions against the association. Since the cost of incorporation is small and the protections are significant, incorporation is definitely a better choice.
- Associations sometimes need to borrow funds for large repair projects in the common areas. Banks will generally make loans to incorporated associations. Generally they will not make loans to unincorporated associations.