Unincorporated organizations Featured

7:00pm EDT November 25, 2007

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 dkolber@bakerdonelson.com.