What Is the Difference Between an Unincorporated Association & a Corporation?

By Tom Speranza, J.D.

What Is the Difference Between an Unincorporated Association & a Corporation?

By Tom Speranza, J.D.

An unincorporated association is any group of two or more people who decide to work together for a nonbusiness purpose. These informal organizations are often used for clubs or to accomplish public interest, political, and charitable goals, such as youth sports teams, scouting troops, homeowners' associations, church groups, and citizens lobbying public officials about a local issue. Whether you knew it or not, you've probably been a member of an unincorporated association at some time in your adult life.

Two men talking and smiling around a table

In contrast, a corporation is formed to own and operate a profit-generating business or to organize and manage a nonprofit charity. Unlike the informal nature of an unincorporated association, a corporation must comply with numerous rules and regulations under state law.

Read on to learn about the major ways that unincorporated associations differ from corporations.

Legal Capacity

Federal, state, and local laws all consider a corporation to be a legal “person" separate from the shareholders who own it. Corporations can legally buy, sell, and own real estate, cars, and other property in their own name. They can open bank accounts, borrow money, sign contracts, sue and be sued in court, and take any other action to further their business.

The states vary, however, in the amount of legal capacity granted to unincorporated associations. While some states permit them to hold title to real estate and other assets, sue in court, sign contracts, and establish banks accounts, other states do not recognize unincorporated associations as separate legal entities.

If your state doesn't consider unincorporated associations to be legal “people," the association can only own property, sign contracts, use the courts, and take other actions that support its mission through its members. In other words, the members of an unincorporated association must perform these legal activities under their own name. When it comes to forming and structuring the governance of a nonprofit entity, the advice of an attorney can assist you in the process.

Limited Liability

Protection from personal liability is the biggest difference between a corporation and an unincorporated association. When you run a business or charity through a corporation, the shareholders' liability for debts and legal claims is limited to the assets of the company, assuming they keep their personal finances separate from the company's and carefully observe the entity's formalities, like board meetings and annual filings with the state.

Although some states grant registered unincorporated associations liability protections, most members of the association are personally liable for all of the association's debts and obligations. This means their personal assets, like houses, cars, and bank accounts, are potentially at risk. For example:

  • If an outside company provided supplies for an association event and went unpaid, the supplier can sue the members, obtain a judgment, and pursue assets—like cars and personal checking accounts—to satisfy the debt.
  • Someone who slips and falls while attending an association event could sue the members for injuries and place a lien on their houses to secure payment of any damages awarded by the jury.

Profit-Earning Ability

A corporation can operate a for-profit business. Unincorporated associations don't have that choice. If an unincorporated association generates income—through donations or a bake sale, for example—and does not use the funds to further its mission, but instead distributes the funds to its members for their personal use, it automatically becomes a general partnership owned by the members.

The general partnership is then legally required to report that income on the U.S. Internal Revenue Service's form for Partner's Share of Income, Deductions, Credits, etc. (Form Schedule K-1). The members must also report that income on their personal tax returns—and pay federal and state taxes on it.

To avoid becoming a tax-paying business entity, an unincorporated association must maintain its nonprofit status by using all generated revenue to further its charitable or public mission.

Entity Formalities

In exchange for the powers granted under state law, corporations must fulfill various legal obligations, including:

  • Filing articles of incorporation with the state and paying a filing fee
  • Electing a board of directors and adopting bylaws
  • Appointing officers like a president, treasurer, and secretary
  • Holding periodical meetings and recording decisions in written minutes or resolutions
  • Filing annual reports and paying annual taxes and fee

Although nonprofit corporations do not have shareholders, they must also elect directors, adopt charters, appoint officers, and hold meetings. Unless an unincorporated association chooses to register with a state that recognizes them as having separate legal capacity, there are no mandatory filings or other entity formalities. However, any unincorporated association with more than a few members should consider writing a charter or constitution and electing a board of directors.

Unincorporated associations are generally used for short-term interests, whereas a corporation is for long-term interests. If you're ready to turn your unincorporated association into a corporation, you might need some help to navigate the different legalities.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.