What Is an Unincorporated Nonprofit Association?

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Is Your Group an Unincorporated Nonprofit Association?

Many so-called nonprofits are simply small groups of people who come together temporarily to perform some social good. They might raise money for a limited purpose such as helping a neighbor or to send the local high school band to a competition  Some groups simply bring in such limited income that a formal business model may not be necessary. 

These informal groups are called unincorporated nonprofit associations.

An unincorporated nonprofit association may be subject to certain legal requirements, even though it hasn't filed for incorporation under its state's incorporation laws.

For example, an unincorporated association may need to file tax returns, whether as a taxable or tax-exempt entity. Additionally, there some states have registration requirements.

There may also be multiple state and local registration requirements no different from a similar nonprofit corporation, such as charitable solicitation registration, out-of-state qualifications to do business, and local business registration.

Recommended actions to provide legitimacy include registering with the Secretary of State even if not required, and administrative steps that trigger other registration requirements (for instance, applying for an Employer Identification Number (EIN) to open a bank account).

There are, however, generally minimal legal requirements concerning corporate formalities and governance under state law.

The Disadvantages of an Unincorporated Nonprofit Association

Members of an unincorporated nonprofit association may be exposed to personal liability for the obligations of the association if state laws do not explicitly provide for limited liability (for example, California provides for limited liability for members of an unincorporated nonprofit association).

Regardless, the law is still less certain regarding personal liability as compared to corporations. Therefore, an unincorporated association may not be ideal if the group's activities might create concerns about contract or tort liability (two common areas where liability issues arise), or if potential members, board members, and supporters would be deterred by such concerns.

An unincorporated association can operate as a tax-exempt nonprofit as long as the purpose of its activity is of public benefit, and annual revenues are less than $5,000. It may even be able to provide contributors with a tax deduction for their donations.

An unincorporated association can also apply for federal tax-exempt status under 501(c)(3) (see Form 1023 Instructions). However, practically speaking, the group may want to seriously consider incorporating at that point especially because the IRS will want to see certain documents even if not required by state law (for instance, organizing documents), and will also be checking for common governance issues such as compensation practices and conflict of interest procedures.

Without a determination letter from the IRS, it may be difficult to get donations and almost impossible to get grants. It may also be difficult to enter into contracts with some other entities (for example, too many risks for the other party without extensive due diligence). The group will also need to check the requirements for obtaining tax-exempt status on the state level.

Although there may be no need to file for tax-exemption under 501(c)(3) if the association has annual gross receipt of normally not more than $5,000, it must still annually file Form 990-N with the IRS.

Associations may also claim tax-exemption under other categories (for example, a 501(c)(4) or 501(c)(6) doesn't need to apply for federal exemption even if income exceeds the $5,000 threshold).

Unincorporated nonprofit associations work best for informal, ad hoc situations where people get together to perform some community service or raise funds for a particular, and usually short-term, goal. If an organization is not ready to file for 501(c)(3) status from the IRS, an alternative may be to seek a fiscal sponsor.

Be sure to consult these IRS publications:

Note: This article incorporates information provided by Emily Chan, a San Francisco-based attorney specializing in nonprofit. It is not intended to be legal advice. It is advised that you consult your own attorney regarding your particular situation.

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