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Subject: Are HOA non-profit and do they need to be incorporated?
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Author Messages
OlyJ
(Massachusetts)

Posts:11


02/21/2008 8:35 PM  
Our developer just turned over the HOA to the neighborhood and we just elected
officers and board members. The one main task of the HOA is to maintain
retention ponds & drainage system.
One question we have:
Are HOAs non-profit organization? Do they need to be incorporated?
Do they need to pay taxes on the property?

Thanks for any answers or comments.

OGJ
RobertR1
(South Carolina)

Posts:5164


02/21/2008 8:50 PM  
Oly,
Yes you should be incorporated by your state. I would bet your organization is already on file at court house.

Believe me, your main task right now is educating your Board and members on you documents and setting up the structure of your administration to govern your HOA. Yes you should be non-profit, and probably are.
Suggest you use search feasture on the Discussion topics page of this site and search for New Hoas or Developer turning over association to the owners, and don't sign nothing until you understand your documents. The developer wrote your documents to made the road easier for him, not necessarily for the owners. Don't rush and don't accept anything you don't know about, be careful, and read what the search pulled up.
Keep posting as you go along.
OlyJ
(Massachusetts)

Posts:11


02/21/2008 9:00 PM  
Robert,

Thanks. The developer had organized it as an LLC.
They gave us a copy of the bylaws which read more like a corporation's bylaws [I suspect that they use a corporate boiler plate bylaws and modified it for HOA]. I will do the search.
LauraR2
(West Virginia)

Posts:41


02/22/2008 12:45 AM  
I agree- get educated about all your documents! I am certainly no expert, but when I tried to get nonprofit status for our association, I found out that to get nonprofit status under 501(c)4, you have to prove your association benefits the *general public.*
hoatalk


Posts:563


02/22/2008 3:51 AM  
Also search for these terms:
developer transition
developer transition checklist

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GeraldT4


Posts:1022


02/22/2008 5:27 AM  
OlyJ - Ah, an LLC. This is, amongst other things, to protect the Developer to limit the liability and potential suit by an association for deficiencies in construction of the HOA. In my state the HOA & COA is mandated to adhere to the non profit corporation act. It requires our Boards or management company perform an annual filing to the NJ Secretary of State, in that filing must be a list of the names and addresses of each Board member.
OlyJ
(Massachusetts)

Posts:11


02/22/2008 8:29 AM  
Laura,

Does sharing a common facility like the pond with neighborhood qualify for "benefitting general public" to get non-profit status?

Thanks,

Oly
OlyJ
(Massachusetts)

Posts:11


02/22/2008 8:31 AM  
Gerald,

I was told by one member that the LLC is for the benefit of the developer and that we'd still
need to file for incorporation.
Thanks.
LauraR2
(West Virginia)

Posts:41


02/22/2008 8:34 AM  
I'm not sure what qualifies as "benefitting the general public." We didn't qualify since we only have private roads. Perhaps others here know more about it.
OlyJ
(Massachusetts)

Posts:11


02/22/2008 8:40 AM  
When and how often do you have to file for tax return?
BrianB
(California)

Posts:2803


02/22/2008 10:11 AM  
lot's of questions, let's see if i can help.

It is up to the board to determine if you are a non profit organization or not. You set the budget, you spend the money, you raise the assessments. MOST HOA's run as a not for profit, but you certainly can make money from your owners, should you desire to do so. They might not be so happy, however.

Yes, you pay taxes on common property. The HOA owns it, so property tax, etc. is attached.

Typically, you file IRS taxes once a year, before April 15th. Most HOA's generally don't owe much, but again, if you made a lot more than you spend, and used that for parties, new cars, ski vacations, etc., then you will pay income tax on it. If you simply put it back into the HOA (reserve funds, maintenance, etc.), you typically don't.

and you must be careful with "open to the public benefit"... your OWNERS are not the PUBLIC. they are shareholders in the business. If you open a pond to "public benefit", that means I can use it anytime too. It also means you must abide by the ADA, and many other federal laws, since you serve the public and are open to all.

Generally, you should offer services ONLY to those who pay assessments (your owners).
DonnaS
(Tennessee)

Posts:5671


02/22/2008 10:28 AM  

OLY,
A LLC is a Limited Liability Corp, which is what Developers use to be a legal entity in their State and Fed. government. That does not and cannot transfer over to your H.O.A. That is when the "corporation" otherwise known as your Home Owners Association must file to become a NOT FOR PROFIT CORP.

I will point out to you again, are you filed as a NOT FOR PROFIT CORP? because you say on your other post--NON PROFIT. They are different so please recheck.
OlyJ
(Massachusetts)

Posts:11


02/22/2008 12:42 PM  
Thanks Brian and Donna for the good answers.
I am concluding now that we need to incorporate but not as a not-for-profit. We'll not make money
except for interests.
BrianB
(California)

Posts:2803


02/22/2008 2:55 PM  
OlyJ,

not technically true: you will make money, every year when people pay their assessments (or every month, etc.). That is income.

then, you will have expenses. Upkeep, stamps, landscaping, taxes, insurance, etc.

Hopefully, your INCOME will exceed EXPENSES at least by a dollar every year. If not, you need a better budget.

the goal of a not for profit business is to turn all the extra income (net income) back to the business, in the form of improvements, savings (reserves), etc. You become a for profit business when you return the net income back to your shareholders or investors in the form of dividends or profits.

RobertR1
(South Carolina)

Posts:5164


02/22/2008 3:13 PM  
Oly,
I hope you take a little friendly advice and consider you may be in over your head. It is not a simple process you have to do to straighten out this mess. It is a decision that has to be made by the owners, not just an individual (you). You have received some solid information here and it would be hoped for your associations sake that you utilize all the talents of your fellow owners. There is nothing wrong with getting a good lawyer to do this (not the developers) as there can be liability involved here if the process is not done correctly.
RobertR1
(South Carolina)

Posts:5164


02/22/2008 3:50 PM  
Brian,
Good solid information. And of course the difficulty after you know what you are doing is to get the structure right so you can apply the solution.
This LLC business spells trouble and was done by the developer to allow him to save money if at all possible. And the confusion about the LLC and changing to a corporation and disolving the LLC is a loaded deal. Better be careful.

I bet neARLY ALL hoa's use their authoprity to collect fees and fines and it all goes back into the corporation. A long range plan can eat up a lot of projected expenses.
OlyJ
(Massachusetts)

Posts:11


02/22/2008 4:19 PM  
Brian and Robet,
All good information, however, when I read the definition of not-for-profit 501(C3) it doesn't seem to fit HOA, even though it's main function is not to make money. See these links:
http://www.clickandinc.com/Massachusetts_nonprofit.asp
http://business-law.freeadvice.com/corporations/non_profit_corporation.htm

It seems to me that HOA should incorporate as S or C corporation and pay little tax by, as suggested,
making sure income vs expenses are nearly 0.
Has anyone tried filing with clickandinc [it claims it is not-for-profit status]?
RobertR1
(South Carolina)

Posts:5164


02/22/2008 5:01 PM  
Oly,
Maybe Mass. is different. Surely you must be close to some other HOA's in your vicinity. Why not pay them a visit, give them a call or see what you can pick up on the internet about HOA;s that have websites. Most have contact buttons or phone #, give them a call.
OlyJ
(Massachusetts)

Posts:11


02/23/2008 9:01 AM  
Robert,

I was talking to a colleague who lives in a small private neighborhood and has an HOA to oversee roads and ponds. I guess their town is small and cannot afford to maintain the neighborhood.

I did find an article from I believe lawyers.com that said HOAs are typically not-for-profit corporations [no one has come out and said definitively]. Mass government website has forms to file for not-for-profit corporation. This thing with HOA was over my head but I am determined to be familiar with the basics so that when I go to hire lawyers, accountantc, etc.,
I have an idea what I want. These professionals tend to specialize in areas and general practice lawyers can cost more money if they have to research and learn the corporate law or some specific law.
At one time, I was looking at starting a small business and got a lot of information from Small Business Administration. They don't discourage people from filing for incorporation themselves, in fact, to save money they do give some advice although there is always a disclaimer. I do believe, if one is determined and has time, one can do it. It seems that one either have time but no money, or have money but no time. To open a bank account, I got a tax ID over the internet, it was real easy.
SusanW1
(Michigan)

Posts:5202


02/24/2008 6:53 AM  
OLY - you are not a CHARITABLE, not for profit - 501(c)(3). (That's what your local food bank or Salvation Army is. They accept donations and grants as their only "revenue") There are about 16 different designations for not-for-profit categories. You will be filing as an neighborhood association.

If your group has assets (which are liabilities, since you have to take care of them) then you should file as a not for profit. That is an IRS Designation that simply says your group operates with revenues matching expenditures. But you don't have to, if you have just one little commons area. You can be designated as an Association.

I think you need a real estate lawyer, ASAP to walk you thru all this.

SusanW1
(Michigan)

Posts:5202


02/24/2008 6:56 AM  
Additional comment:

If your expenditures are less than $5,000, the IRS doesn't care about you - (even up to $25,000) So you need to list all your liabilities and determine if you should organize yourself as a corporation or keep it as an Association.
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