In choosing between a corporation and an unincorporated association, the main concerns are filing requirements, longevity, limited liability and profit making. All business entities are regulated under the laws of the state where the association is located. Every state has business laws that are substantially similar to other states, but not exactly the same. It is essential to understand the difference between business structures to protect yourself and other owners from unexpected liability.
In order to form a corporation, you must incorporate by filing articles of incorporation with your state business registrar. Conversely, an unincorporated association is typically a gathering of persons, often volunteers, working toward a common purpose. In most states, unincorporated associations are not required to register with the state. In addition to formation documents, corporations must meet additional reporting and recording requirements to remain in compliance with state law; unincorporated associations usually are not legally required to adhere to such requirements. For example, many states require corporations to maintain minutes of all board meetings, as well as detailed financial records.
A corporation is an independent legal entity, meaning that it may act as an artificial person separate from the owners and stockholders. A corporation may hold property, enter into contracts, sue or be sued, and incur debt in its own name apart from the shareholders. If the shareholders change or pass away, the corporation will continue to exist and its legal obligations will not be affected. An unincorporated association is not an independent entity, but instead functions like a partnership. If an unincorporated association owns property or owes money, the owners of the association do as well, and will continue to do so even if the association no longer exists.
Participants in an unincorporated association usually do not enjoy limited liability. If an unincorporated association is sued or goes bankrupt, the personal assets of the owners may be used to pay off the association's debts. Conversely, when a corporation is formed, the stockholders and board members are not personally liable for the debts of the business, with few exceptions. Shareholders are only liable for the debts of the business to the extent that they have invested money into the corporation.
A corporation may be formed for profit, or may be a nonprofit enterprise. Unincorporated associations are typically not formed to generate profit, but are frequently small nonprofit enterprises. For smaller nonprofit organizations that do not regularly engage in transactions with third parties and have a very small budget, an unincorporated association may be a better business entity to avoid filing and reporting requirements. However, businesses seeking to make a profit may be interested in the limited liability provided by a corporation or similar business structure.
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."