Unincorporated organizations

Have you ever sold goods or services to a group organizing a fund-raising event, such as a bicycle or foot race? Have you been a member of
a group sponsoring such an event? In
either case, you should be aware of the
risks of being involved with an unincorporated organization.

Operators of businesses or activities
not using a legal structure, such as a
corporation, limited liability company
or limited partnership, lose their protection from personal liability for the
debts and torts (wrongful acts) of the
business.

Smart Business learned from Daniel
Kolber, a shareholder with Baker,
Donelson, Bearman, Caldwell &
Berkowitz, PC, what businesses should
know before sponsoring, selling to or
doing business through an unstructured organization.

What types of groups classify as unincorporated organizations?

Generally, an unincorporated association or organization is a collection of
people who have come together to
carry out some common enterprise.
Examples include clubs, political
groups, churches and synagogues,
unions, and trade groups. The organization could be for-profit or nonprofit.
However, if the unincorporated association is organized for profit, most state
laws say that the association is actually
a partnership. The result: Each member
can be bound by the acts of the other
members as if they were partners. In
other words, if one member binds the
association to pay money, all other
members could be liable for the debts
of the association.

In the case where the unincorporated
association is not organized for profit,
then generally each member is not
bound by the acts of the other members. The nonprofit, unincorporated association is bound by the acts of its
manager, officers or agents.

What are some of the issues that can
arise with unincorporated organizations?

A helpful way to understand an unincorporated association is to see it as a
group of people making a contract
among themselves. This contract could
be oral or in the form of a charter,
bylaws, constitution, memorandum of
understanding or some other agreement. Unlike corporations, unincorpo-rated associations are not created pursuant to a statute. Therefore, courts are
reluctant to decide cases involving disputes over control of the organization,
such as whether certain members
should be expelled or not. If no money
or property is involved, the courts will
usually toss out the case.

Most states have now passed statutes,
including Georgia, providing that unincorporated associations may sue and
be sued. Generally, an incorporated
association can be sued in any county where the association does business or
has a branch or local organization.
Generally, when you sue an unincorpo-rated association, you have to deliver a
summons and complaint to any officer
of the association. In many states, such
as Georgia, the association may file
with the secretary of state a designation of an officer or agent that can be
served with process in a lawsuit. If this
filing is made, only that person can
be served.

The property of the association is
available to the winner of the lawsuit.
Generally, the winner of the lawsuit
cannot go against the individual property of any member unless the member
personally participated in the transaction at issue and was properly served
with the lawsuit.

If you participate in an unincorporated association, be aware that knowledge of a transaction without objecting
may be enough to hold a member
liable.

How can risks be avoided?

Most secretaries of state have a Web
site that allows you to search a database to see if an organization is operating through a legal structure. If you do
business with an unincorporated association, you should try to have a member or officer agree to be personally
liable to pay you. On the other hand, if
you are doing business through an
association, you should incorporate or
establish a limited liability company or
limited liability partnership.

DANIEL KOLBER is a shareholder with Baker, Donelson,
Bearman, Caldwell & Berkowitz, PC. Reach him at (404) 577-6000 or [email protected].

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