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Subject: Incorporation, CC&Rs vs Sterling Davis, and Elections
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EM2
(California)

Posts:24


01/21/2012 9:08 PM  
I have volunteered to gather information on the "pros and cons" of incorporating our HOA (in California). Built in the 1980s, fewer than 15 units, the CC&Rs have never been amended and obviously long predate Sterling Davis. The board does not follow its own CC&Rs for having elections (eg having verbal votes rather than in writing as dictated because there are always only one volunteer for each slot, so having elections by written ballot is seen as being pointless). I am concerned this could open us up to a lawsuit by former or current owners who can claim the elections and therefore subsequent decisions are invalid. Further, we only ever have one open meeting a year, the rest of the meetings are for the three board members only (the CC&Rs say there only needs to be one annual open meeting).

Some owners don't see the point of the expense of incorporating with the state or updating the CC&Rs because they do not see any inherent risk by keeping them as they are. For example, liability is believed to be covered by BOD Insurance, and incorporating will not provide any extra protection. We also do not have a property management company because people perceive it to be too expensive, even though we often do not get repairs done in a timely manner and no one is willing to go after owners who don't pay dues because "its too difficult and we likely wouldn't win anyway." All money management is in the hands of the resident treasurer (who *fortunately* is honest, competent, and sane). While we don't have concerns about corruption with the current board, it seems like we are just asking for a huge host of trouble if we keep things as status quo. A growing chunk of the owners want to move in this direction, but we need good evidence to back us up (and going to an attorney is not an expense the board will approve at this stage). It just seems negligent not to move forward but we need examples...

Can anyone provide me with resources as to: a) pros/cons of Incorporating the HOA in California (as I mentioned, I've been told by the current board that it won't impact liability but I don't know if that is true); b) what is the impact of the fact that our CC&Rs are going on 30 years un-updated; c) anything else I might not be thinking of?
TimB4
(Virginia)

Posts:9475


01/22/2012 4:27 AM  
I believe that a company can be incorporated anywhere. Mind you it's easier for Associations to be incorporated in the state they do business.


If Incorporated - CA HOA laws apply. The Corporate laws of the state your registered in applies.

Example: Incorporated in CA - CA HOA laws apply. CA Corporate laws apply.
Incorporated in VA - CA HOA laws apply. VA Corporate laws apply.


Taxes - You will probably have to pay taxes in both CA and what state you incorporate in.


EM2
(California)

Posts:24


01/22/2012 8:03 AM  
Thanks for the reply. There's no question we would incorporate in CA, its just a question of pros/cons of incorporating versus not. Are there additional protections gained by incorporating, or what makes it worth the expense and time...
JohnB26


Posts:0


01/22/2012 8:46 AM  
w/o incorporation: every owner/member is subject to direct personal liability

incorporation: no personal liability, corporate liability only

eg: common elements worth $400,000 and a successful law suit for $5,000,000 means; a) unincorporated - pay up all you owner/members PERSONALLY
b) incorporated - lose the common elements (probably the 'winner' will not want your retention pond) w/o any PERSONAL liability


DOH
JohnC46
(South Carolina)

Posts:4202


01/22/2012 8:55 AM  
A goodly part of this is state law. As an example, many (but not all) states allow for a LIMITED LIABILITY CORPORATION (LLC) which are easy and cheap to form. I do not know if an LLC will work for an HOA but my point is state law varies.

As much as I dislike saying this...it is time to lawyer up.
JohnC46
(South Carolina)

Posts:4202


01/22/2012 9:00 AM  
to JOHNB26

I did a post about HOA Liens in South Carolina. Hoping you respond to it.

Thanks.
JeffR7
(California)

Posts:251


01/22/2012 1:02 PM  
If you are not incorporated now is there an HOA at all? If so what is form of it?

Usually most HOAs are incorporated by a developer and the HOA is a legal entity that collects assessments and enforces CC&Rs.

By the way if number of candidates is equal to the number of open board slots there is no requirement to do a secret written ballot. It's possible that you are fine in that regard.
EM2
(California)

Posts:24


01/22/2012 1:45 PM  
It is just an unincorporated hoa. The original developer paperwork clearly calls it an unincorporated HOA.
He never incorporated nor did subsequent owners...

Wouldn't he cc&rs need to say the election only needs written ballots if there are more candidates than slots for the latter to be true?
TimB4
(Virginia)

Posts:9475


01/22/2012 1:58 PM  
EM2,

Being incorporated has the Association be seen as a legal entity.

As a legal entity, the Association gains certain rights and protections they do not have if unincorporated. These rights are typically based on State laws.

Here is a site I found in a google search that lists pros and cons:

the business place.com
JeffR7
(California)

Posts:251


01/22/2012 2:08 PM  
I don't know what your Bylaws or CC&Rs state in regards to elections and they might be more strict that the state law, but according to Davis-Sterling Act you are not required to have secret ballots if the number of candidates equals to the number of open positions. However, if the terms are different for different position you might still need election to figure out who severs a longer term and who serves a shorter one.
EM2
(California)

Posts:24


01/22/2012 3:17 PM  
Thanks TimB4, that is very helpful. Its still a little unclear to me if an HOA specifically gains liability protection by incorporating as a non-profit, as there is additional rules/insurance that protect the HOA from liability alraedy. But it seems to suggest that those protect the board, but not the owners individually.

Re: Elections - The CC&Rs/ByLaws do not have differing guidelines for differing positions, all are one year terms starting at the annual meeting. At one point they refer to four positions (Pres, VP, Treas, Secy) but then details of the positions only list president, treasurer and secy. The VP seems to have disappeared in practice and in the details of the CC&Rs (its only mentioned once).
TimB4
(Virginia)

Posts:9475


01/22/2012 3:33 PM  
EM2,

As I understand it, if I'm hurt on association common area and believe there is negligence involved, I would have to do the following:

If association is incorporated - file a claim against the Association
If association is unincorporated - file a claim against each homeowner in the development (this is because an unincorporated association is not a legal entity in the eyes of the courts).

A member in an unincorporated association would then have to deal with an attorney, etc.
A member in an incorporated association would get a report from the board about the issue but would not have to take any action to address the case.



EM2
(California)

Posts:24


01/22/2012 4:34 PM  
Thanks for clarifying Tim!
TimB4
(Virginia)

Posts:9475


01/22/2012 6:51 PM  
Posted By EM2 on 01/22/2012 3:17 PM

Re: Elections - The CC&Rs/ByLaws do not have differing guidelines for differing positions, all are one year terms starting at the annual meeting. At one point they refer to four positions (Pres, VP, Treas, Secy) but then details of the positions only list president, treasurer and secy. The VP seems to have disappeared in practice and in the details of the CC&Rs (its only mentioned once).




Directors are elected by the membership
Officers are appointed by the Directors (and usually amongst themselves)

Typically an individual elected to the Board will wear two hats (fill two positions), Director and Officer.


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