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What is the Personal Liability of Members of an Unincorporated Nonprofit Association in California?

What is the Personal Liability of Members of an Unincorporated Nonprofit Association in California?

Full question:

We have a rural water system in northern California that is run now as an unofficial coop with 12 households. If we file for an EIN with the IRS and become an unincorporated non-profit, does that significantly change our collective or individual liability?

Category: Corporations
Subcategory: NonProfit Corporation
Date: 04/07/2025
State: California

Answer:

If you wish to significantly alter the liability of individual members, an incorporated entity should be considered. Unincorporated status does not have corporate status and offer the protection against indidual liability that corporate status offers. In a nonprofit association, each member is generally personally liable for the obligations and misdeeds of the association. The law regarding unincorporated associations is unclear.

The following are reasons why a member, director, officer, or agent of a nonprofit association in California may be held individually liable, aside from common law theories of liability:

(1) The member, director, officer, or agent expressly assumes
liability for injury, damage, or harm caused by particular conduct
and that conduct causes the injury, damage, or harm.
(2) The member, director, officer, or agent engages in tortious
conduct that causes the injury, damage, or harm.
(3) The member, director, officer, or agent is otherwise liable
under any other statute.

Tax-exempt, nonprofit status does have drawbacks, such as:

•Profits of the organization cannot be divided among workers or directors (although workers and directors may be paid reasonable salaries)

•Only a small amount of the group's income can be earned from sources unrelated to the organization's reason for receiving tax-exempt status

•The assets of the group cannot go toward purposes other than those that warranted the tax-exempt status

Please see the following CA statutes regarding unincorporated non-profit associations:

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=corp&group=18001-19000&file=18605-18640

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

Which is better, incorporated or unincorporated?

Choosing between incorporated and unincorporated depends on your needs. Incorporated entities offer personal liability protection for members, which unincorporated associations do not provide. This means that in an unincorporated setup, members can be personally liable for the group's obligations. However, unincorporated associations are simpler to establish and may have fewer regulatory requirements. Consider your group's goals, the level of liability you're comfortable with, and the administrative burden you're willing to take on before making a decision.

What are the benefits of an unincorporated association?

Unincorporated associations are easier and cheaper to set up than incorporated entities. They require less formal structure and fewer regulatory obligations. Members can manage the association with more flexibility, and they may also enjoy certain tax benefits if they qualify for tax-exempt status. However, it's important to note that these associations do not protect members from personal liability for the group's debts or actions.

What is an unincorporated nonprofit association in California?

An unincorporated nonprofit association in California is a group formed for a charitable, educational, or other nonprofit purpose without formal incorporation. It operates under the principles of mutual benefit among its members. While it can apply for tax-exempt status, it does not provide personal liability protection for its members. This means members can be held personally liable for the association's debts or legal issues.

What is an unincorporated association in California?

An unincorporated association in California is a group of individuals who come together for a common purpose without forming a corporation. These associations can be informal, like a community group, or formalized with bylaws. They do not have the same legal protections as incorporated entities, meaning members can be personally liable for the association's debts and obligations. They are governed by California's Corporations Code (Cal. Corp Code § 180).

What is the difference between a nonprofit and an unincorporated association?

The main difference lies in their legal status. A nonprofit organization is typically incorporated, providing personal liability protection to its members and formal recognition by the state. An unincorporated association, on the other hand, is not formally registered and does not offer such protections. While both can serve charitable purposes, the unincorporated association may have fewer regulatory requirements but exposes its members to personal liability.