Should Our Association Incorporate?
What is it?
Incorporation is the formation of an entity, typically a non-profit corporation for an association, by filing the requisite documents with the State of Hawaii. Incorporating is not required in order to operate as an association in Hawaii, however, there are certain advantages.
Advantages of Incorporation
The incorporation of an association provides several actual and potential benefits. First, and foremost, it creates a “corporate shield,” whereby the personal assets of association members would not potentially be at risk in the event of a large monetary liability of the Association. Some courts will hold members of an association jointly and severally personally liable for certain actions, which may not be covered by association insurance. To the extent that an association is incorporated, an action of the corporation can only result in a judgment against the corporation. Where a judgment is obtained against an incorporated homeowners’ or condominium association, the members of the corporation are only subject to being assessed by the association for their pro-rata share of the corporate liability.
Second, title companies prefer that associations act as entities when holding title to property under the association’s name. Insurers may also provide better premiums to incorporated associations.
Third, an incorporated association has the ability to borrow funds, whereas an unincorporated association has more difficulty. Association borrowing is becoming an option that is increasingly popular for associations as they face huge unfunded capital requirements, and more and more banks are entering the market to make these loans.
A fourth advantage is that the corporate statute would be available to provide answers and guidance to procedural issues that might not be addressed in either the condominium statute or the Association’s governing documents. Hawaii Revised Statutes chapter 414D governs non-profit corporations and provides non-profits with a body of law to answer questions regarding liability, meetings, dissolution and so forth. The answers provided by chapter 414D can help fill the gaps.
One slight disadvantage of incorporating is that the corporate formalities should be followed in accordance with chapter 414D. However, the association follows the same corporate formalities in following the association statutes codified in Hawaii Revised Statutes Chapter 514B and its governing documents, so this impact is minimal.
Another disadvantage is that the association will need to file an annual report with the State of Hawaii to keep the entity current and pay the filing fee. The property manager will usually perform this duty on the association’s behalf.
(Photo Credit: Samuel Zeller)