What Is an Unincorporated Organization?

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Key Takeaways

• Unincorporated associations have an informal structure.

• General partnerships, sole proprietorships, and nonprofit associations are common types of unincorporated organizations.

• If a business remains an unincorporated organization, the owners may be personally liable for business debts, lawsuits, and obligations.

How Are Unincorporated Organizations Structured?

Unincorporated organizations or associations are informal. Incorporation happens when a business files the paperwork required by state law to form a corporation with the secretary of state. But an unincorporated organization has not filed any documents with the secretary of state.

An unincorporated organization is also skeletal. The only requirement is that people come together to accomplish a common purpose. Although it is not a formal business entity, it may use bylaws to make day-to-day decisions.

Bylaws usually include:

• The association’s name,

• The association’s purposes

• Officers and terms of each officer

• Decisions regarding association funds

Unincorporated associations do not have to file annual reports with the secretary of state.

Types of Unincorporated Organizations

General Partnership

One common type of unincorporated association is a general partnership. A general partnership is formed when two or more people come together to carry on a business for profit. General partnerships also have no formal paperwork requirements.

Sole Proprietorship

Another common unincorporated association is a sole proprietorship. A sole proprietorship is what people typically think of when they think of someone owning their own business. A sole proprietorship also does not require formalities.

Nonprofit Associations

Additionally, nonprofit organizations may operate as unincorporated nonprofit associations. As its name suggests, a nonprofit organization has a nonprofit purpose. Examples of nonprofits include churches, social organizations, or educational foundations. However, an unincorporated nonprofit may have to register its activities with the state attorney general’s office.

How Are Unincorporated Organizations Taxed?

Unincorporated organizations do not pay separate corporation taxes. Instead the net profits go on the individual members’ personal income tax returns filed with the Internal Revenue Service (IRS).

What Are the Risks of Remaining Unincorporated?

An unincorporated association is not a separate legal entity from its members. That means the members of the association are personally liable for business debts and loans and lawsuits.

Business Debts and Loans

If you take out a loan for your unincorporated association, you are essentially taking out a loan in your own name, and you will be responsible for repaying the loan.

Incorporating eliminates the risk of personal liability. After incorporation, the business is a separate legal entity.

Lawsuits

Remember, since incorporation has not occurred, the unincorporated organization or association has no legal existence separate from its owners. Therefore suing the business is essentially the same as suing the business owner personally.

There is no limited liability for unincorporated organizations.

Alternatives To Unincorporated Organizations

You may want to discuss how to protect your personal assets from your business activities with an experienced business lawyer. They can discuss several alternatives that provide personal liability protection, such as:

Corporation – A corporation is a legal entity that separates the business owner from the debts and obligations of the business giving the owner liability protection.

Limited Liability Company (LLC) – An LLC is a business structure that provides the limited liability of a corporation and pass-through taxation of an unincorporated organization such as a sole proprietorship or general partnership.

Limited Liability Partnership (LLP) – A limited liability partnership is similar to a general partnership where each party has limited personal liability for the debts of the partnership.

Or if you want to form a business entity such as a corporation or LLC, you can use our trusted partner, LegalZoom for your business formation.

Internal Links

• How to Form a Nonprofit
• Types of Business Structures