Starting a non-profit corporation can be a great way to give back to the community or support a cause you are passionate about. A growing number or start-ups are turning to this corporate structure because of its associated limited liability protection, tax exemption status and high degree of flexibility. But the charitable nature of the business has to be confirmed by the Internal Revenue...
Whether a sports club, teachers’ association, or nature conservation club - very different purposes and goals can lead to the foundation of an association or club. But are there requirements for forming an association? What about incorporated or unincorporated associations? What is the exact definition of an association? Are voluntary associations and clubs the same thing? These questions are some that you’ll need to look into if you want to start your own organization. There are good reasons for the popularity of associations: They offer their members a reliable, democratic organization, relieve the individual members and the board of the contractual liability and are comparatively simple and cost-saving to start.
- What is an association?
- What are the differences between incorporated businesses and unincorporated associations?
- What are the advantages of starting an association?
- What are the limitations of starting an association?
- Things to consider when starting an association
- How do you start an association?
Starting a sporting, cultural, social, or charitable association can be hugely rewarding, but it also comes with its challenges. You’ll want to consider whether the foundation of a registered association is the best choice. Or have you already made up your mind and would now like to know what the prerequisites are, what steps are necessary and what costs you have to expect when founding a club? Find out everything you need to know about founding an association here.
What is an association?
According to encylopedia.com, an association can be defined as: “a group organized for the pursuit of one interest or of several interests in common. Associations are usually contrasted with involuntary groupings serving a greater variety of ends, such as kin groups, castes, social classes, and communities.” This shows the history of an association: before even being part of a legal system, associations were an integral part of society, showing individuals’ collective interest in a topic, or their connection to one another. This article will not focus on the anthropological and sociological origins of associations, and instead look at them in a business context. It is good to know, however, that associations have been part of our society for years, long before they were institutionalized.
Nowadays, however, an unincorporated association is still a group of individuals who gather for a certain purpose. This can be quite varied, but the importance is that there is a particular goal or motivation behind the gathering; a group cannot just be an association if there isn’t a clear link between them. In the USA, an association is also sometimes called a voluntary organization, or unincorporated association. We will look at the difference between an incorporated organization and an unincorporated association below, as it may influence which form your business takes.
The definition from the IRS is that an association is: “a group of persons banded together for a specific purpose. To qualify under section 501(a) of the Code, the association must have a written document, such as articles of association, showing its creation. At least two persons must sign the document, which must be dated”. This means that you’ll need at least 2 individuals to form an association, and that you should draft out your rules and regulations, for example, as your written document. Sounds simple enough, but the articles of association document may need to be drafted using particular language in order to be valid.
What are the differences between incorporated businesses and unincorporated associations?
The legal structure of your business is important. It influences things such as how you employ people and taxes so it is important to get it right. LLCs and corporations are incorporated businesses and are for-profit. This means that the profits a business makes will go to the shareholders and investors of the business, rather than back into the organization itself. Sole proprietorships and partnerships are unincorporated businesses for profit; but not associations. In most states, unincorporated associations do not have to register with their state, whereas unincorporated businesses do have to. Furthermore, an unincorporated association is not seen as an independent entity. Instead of this, an unincorporated association works like a partnership, but is not one, due to its non-profit status.
When profits cycle back into an organization directly, this is known as a non-profit organization. The non-profit will use any money it has made to increase the reach and influence of the business, to further the goal or mission of it. This is also why it is important that your association has a clear purpose; without a clear purpose it may be difficult to justify non-profit status. This status as a non-profit business is a somewhat touchy subject in the US at the moment, and for good reason; non-profits receive tax exempt status from the government, which is clearly hugely beneficial to the business. An unincorporated association is not recognized as a ‘legal entity’ under US law, which is different to an incorporated organization. The unincorporated organization doesn’t have legal rights, and is not a separate entity to the members which make it up. This is why members must hold the finances and property, for example, of an unincorporated association, because it in itself isn’t a legal entity, and cannot do these things.
An unincorporated association is a non-profit organization, and an association is just that: A not-for-profit, unincorporated association. But does your business fulfil the requirements to be one? And does it make sense to choose an association as your business’ legal structure?
What are the advantages of starting an association?
As mentioned in the previous section, one of the benefits of being an unincorporated association is that you are able to make use of a tax-exempt status within the US. This is helpful for associations which are just starting out, because it minimizes the amount of bookkeeping that is required.
Furthermore, you are not obligated to register with any government departments because an unincorporated association will not be bound by regulations. This makes sense when you think about it: starting an association is different to starting an incorporated business, because they have different aims, you don’t have to register your business because technically, it isn’t one.
If your unincorporated association is also a charity, you will have to do more legal and financial work. Just make sure if you apply for charitable status that you are aware of the additional administrative requirements.
One final benefit is that you are in some way much more flexible as an unincorporated association. As long as they are effortlessly updateable, and of course lawful, the regulations of an unincorporated association can be freely chosen. As mentioned before, although these rules can be whatever you want them to be, your constitution may be required to have certain clauses, phrased in a certain way.
Generally speaking, therefore, the advantages of being an association can be categorized as the benefits of flexibility and simplicity, which allow for greater freedom. Not being bound by as many regulations, you’ll have more time to focus on what matters, and you can save money on accountants and taxes, for example.
What are the limitations of starting an association?
Sadly, not all aspects of being an association are a bed of roses. There are certain disadvantages to the legal status of being an association. One particular disadvantage is due to the very essence of being unincorporated, which is that the association doesn’t represent a separate legal entity. This means that the association is not legally distinct from its members, so the committee members themselves have to hold assets or enter into contracts for the association. For example, if there is a swimming team which has registered as an association and rented a swimming pool, and for some reason there is a breach in the rental contract, the claims made would be against the individual members of the committee.
Another issue of being unincorporated is the matter of transferring assets. Because the association itself is not a legal entity, it cannot hold property. Any assets that the association has will be held by the members of it, and once a person leaves the association there is the matter of transferring these assets to another individual. This could be complicated, if, for example, someone leaves on bad terms. Good advice to prevent this is to maintain good communication in the workplace.
If these disadvantages turn you off starting an association, it is worth bearing in mind that you can always start out as an unincorporated association and incorporate further down the line. That way you can monitor how long you are truly taking advantage of the benefits of being an association, but as soon as the drawbacks outweigh these benefits, you can consider incorporating.This will most likely save you money in the beginning.
Things to consider when starting an association
There are lots of things to consider when starting an association, but two of the most important things are how the management will be structured, and how you want to draw up the membership rules.
For most clubs, it is impractical for every member to have a vote on every decision. Therefore, a management committee is usually elected to run the organization on behalf of the members. The authority of this management committee should be written into the rules of the association, and because every member has agreed to those rules when they sign up as a member, the structure of management is fairly simple. The committee should be voted in, so that even though members agree to follow the rules by signing up, they still have some authority themselves because they can decide who represents them. That leaves the committee as representatives for all the members.
It is important when starting an association to consider how the committee will be appointed, what duties, authority and responsibilities the management committee will have, and under what circumstances their positions end. You should write these into the rules of your association.
When starting an association, you will no doubt want to attract members to join your worthy cause. You should, however, consider the criteria or eligibility for becoming a member, how a person becomes a member and importantly, how and under which circumstances membership ends. This should be considered right from the beginning. You may consider giving committee members the power to end the membership of those who behave in ways which are incongruent with the rules and/or values of your organization.
All living things change, and you’ll want to make sure that your organization is vibrant and lively. For that reason, you might need to have a process by which you or the committee can amend the rules. It might also be the case that over time the members themselves may see fit that the rules change, or that the organization’s purpose is amended. Change is a good thing, but it needs to be carried out with caution and respect.
An annual general meeting might be a good idea, not just for morale and community spirit of the group, but also to give your association the time to make important decisions. Meeting in person is always preferable, but it is also possible to have more frequent gatherings with all members thanks to online meeting software such as Skype or Zoom. These are an option where meeting in person is not.
How do you start an association?
Starting an association will most likely feel like setting up a business. For this reason, coming up with a sound business plan is a good idea, even if the organization itself won’t function like an incorporated association. A business plan will put you on the right track and help maintain professionalism in the early days. We often speak of ‘forming an association’, but it should have become clear that you don’t really need to form an unincorporated association – truly forming one would change its structure into an incorporated association and that is another matter entirely. What is necessary to start an association is what we have outlined above: management rules and management selection. You decide on the formal implementation of these rules, but it’s worth starting off with a good foundation, and official documents can save you hassle down the line.
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