An unincorporated nonprofit association (UNA) is a nonprofit version of a limited liability company (LLC). A UNA is two or more people joined together by mutual consent to pursue a common nonprofit purpose. The association is formed without any legal formalities or paperwork. Since it is a nonprofit organization, no authority or management organization is required.
If the purpose for the members joining together is to benefit the public and does not include earning a profit, the members have formed an unincorporated nonprofit association. These associations are formed all the time, often without the members being aware.
There are many examples of UNAs. These include times when members of a community join together to help raise funds to keep the local library branch operational, they have formed an UNA. Another example is a group of people who come together to aid in disaster relief. UNAs are formed when children run lemonade stands to raise money for a local pet shelter or other charitable donation.
The UNA has no separate legal existence from its members for tax or debt purposes. This is one of the biggest drawbacks and the reason most nonprofits prefer to form a nonprofit corporation. Because it is not a separate legal entity from its members, the members may be personally liable for the association’s debts and liabilities.
California gives limited liability to nonprofit association members, but the protection is not as substantial as from a nonprofit corporation. Not all states provide this protection. If a state law does not contain an enabling statute which grants the association the right to do so, they cannot hold property, receive property, or sign contracts in their own name.
Nonprofit unincorporated associations are usually used for short-term or limited goals, such as raising funds for a community cause or business. If a nonprofit has a long-term mission, it should incorporate.
Some states have chosen to adopt the Uniform Unincorporated Nonprofit Association Act. This act provides some protections from liability for members by recognizing some unincorporated nonprofit associations as separate legal entities from its members. These laws vary by state.
Is an Unincorporated Nonprofit Association Different From a Nonprofit Corporation?
Yes, there are differences between an unincorporated nonprofit association and a nonprofit corporation. As opposed to being just an association of people coming together, a nonprofit corporation is formed with its main goal being to benefit the public. This goal, known as a public purpose, usually involves a religious, charitable, or educational purpose.
A nonprofit corporation is formed for the purposes of making a profit. In most cases, nonprofits are formed in order to provide a good or service to the public. Instead of the profits being shared with shareholders, the profits go back to the organization to be used for the public good or service. The profit, however, is that amount which is left over after expenses, costs, and employee salaries are paid. A nonprofit corporation can receive tax-exempt status at the state and federal levels.
It is more complex to form a nonprofit corporation. It involves more paperwork and online work to comply with regulatory rules. There are benefits to incorporating as a nonprofit corporation. These are mostly due to its characterization as a separate legal entity. This characterization provides benefits such as more liability protections for its members and the ability to contract with third parties.
In a nonprofit corporation, members are exposed to less personal liability for things such as debts as an unincorporated association. Some states, such as California, provide limited liability protection for members of unincorporated associations, but they are still not as strong as the protections in a nonprofit corporation.
A nonprofit corporation has the ability to contract with third parties. This may include financial institutions, suppliers, other organizations, and individuals. This is different from an unincorporated nonprofit association, where a member must personally enter into such contracts.
Do I Have To File Anything To Form an Unincorporated Nonprofit Association?
No, an individual interested in starting an unincorporated nonprofit association does not have to file anything. It may be helpful to file with a registered agent if the members intend for the association to last longer than a year or desire it to be prominent.
Can An Unincorporated Nonprofit Association be Tax Exempt?
Although an unincorporated nonprofit association is not a corporate entity, it may qualify for section 501(c)(3) tax-exempt status with the Internal Revenue Service (IRS) if the purpose of the UNA falls within the IRS’ exempt purposes. In order to file for the Recognition of Exemption, also known as Form 1023, the association will need the exempt purpose to be included in its articles of association.
An unincorporated nonprofit organization with a gross revenue of less than $5,000.00 is not required to file Form 1023. However, individuals may be more willing to donate to an organization that can provide a section 501(c)(3) determination letter from the IRS because that makes their donation tax-deductible.
Once an unincorporated nonprofit association receives tax-exempt status from the IRS, it must comply with annual filing requirements. The IRS requires the association to file one of the Form 990 series forms. The proper forms depend on the filing threshold as follows:
- The Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ, or Form 990-N, is the proper form for association with gross receipts of $50,000.00 or less;
- The Short Form Return of Organization Exempt From Income Tax (Form 990EZ) or the Return of Organization Exempt From Income Tax (Form 990) are the proper forms for an association with gross receipts of less than $200,000.00 and assets with a total less than $500,000.00.
- The Return of Organization Exempt From Income Tax (Form 990) is the correct form for an association with gross receipts of $200,000.00 or more and assets of $500,000.00 or more.
How Can I Dissolve an Unincorporated Nonprofit Association?
An unincorporated nonprofit association can be dissolved by abandoning it. Members must ensure all debts and liabilities have been satisfied. The association can be dissolved at any time. If there are less than two members in the association, it is automatically considered to be dissolved.
What Kinds Of Organizations Become Unincorporated Nonprofit Associations?
An unincorporated nonprofit association receives benefits of being a nonprofit, including:
- No leadership organization requirements;
- No registration requirements; and
- No taxes.
These benefits made an association ideal for members to form for a limited time, such as:
- A 527 committee, or a political group not regulated by the Federal Election Commission;
- A political action committee;
- A political fund-raising campaign; and/or
- A public affair committee.
Do I Need an Attorney To Help Form Or Dissolve My UNA?
Since unincorporated nonprofit associations do not often protect members from liabilities and many are political in nature, it is important to consult a business attorney to make sure members are protected. A business attorney can assist with providing the property documentation to the IRS in order for an association to receive and maintain its tax-exempt status. A business attorney can also assist if the members of a UNA wish to become a more formal nonprofit corporation.
Although UNAs are easy to form, there may be state-specific regulations they must follow to qualify for tax benefits. A business lawyer can help make sure the UNA follows these regulations. They can also be found on the IRS website.
The UNA may also be required to file tax returns if it continues indefinitely. A business attorney may recommend the UNA register with the Secretary of State or apply for an Employer Identification Number (EIN) number in these cases.
