Current Uniform Acts

Unincorporated Non-profit Associations Statement of Principles 2007

B. Scope.

Principle #1. A UNA is an unincorporated organization formed pursuant to an agreement, written or oral or inferred by conduct, by two or more persons to pursue one or more common lawful nonprofit purposes that is not organized as a trust, a cooperative, a domestic partnership, or, except as otherwise provided in the Act, formed under any other statute that governs the organization and operation of certain designated unincorporated associations, and that is not merely a means of holding title to property as co-owners. A UNA has members, managers and governing principles.

Comments:

1. An organization cannot be a UNA if it is organized as a corporation or is a for

profit unincorporated entity, e.g., a partnership. On the other hand, not every form of unincorporated nonprofit organization should automatically become a UNA and therefore be able to have limited liability and the other benefits of this statute. That is the reason for the language excluding trusts, domestic partnerships, and agreements merely to hold title to property as co-owners. The laws governing the rights of creditors, trustees and beneficiaries of trusts are well developed and therefore the legal principles in this Act are unnecessary. In some jurisdictions cooperatives are classified as unincorporated associations and may be considered nonprofits if they restrict the distribution of their net proceeds to their members. Since there is extensive existing statutory and common law governing cooperatives, however, they should be excluded from the Act. Domestic partnership statutes provide certain rights to adults co­habiting together who are not legally married. Living together in this manner can probably qualify as an association having a nonprofit purpose, but for public policy reasons a registered domestic partnership should not be able to qualify automatically as a UNA and therefore avoid individual liability for taxes and other liabilities. For similar reasons, mere co-ownership of

property, even if for nonprofit purposes, should not automatically result in the applicability of this Act. An enacting jurisdiction can choose to expand or reduce the number of types of exclusions consistent with the concept that a UNA is a default form of organization for unincorporated nonprofit entities.

2. “Agreement” rather than “contract” is the appropriate term because the legal

requirements for an agreement are less stringent and less formal than for a contract. The agreement to form a UNA can be in writing, or oral, or inferred by conduct (e.g., course of performance or course of dealing). The term “writing” is to be broadly construed to include any form that constitutes a “writing” under the laws of the enacting jurisdiction, including electronically communicated documents such as e-mail communications. The agreement to form a UNA is part of the UNA’s overall “governing principles.” See Principle 2. Although it is always preferable to have written agreements, most existing UNAs are quite informal and have few, if any, writings setting forth the agreements governing the purpose and operation of the organization. Moreover, most UNAs are formed and operate without independent legal advice. Imposing a statute of frauds writing requirement would, therefore, have the effect of excluding most existing UNAs from being able to qualify under the Act. The enacting jurisdiction’s general rules governing the proof and effect of oral agreements and the priority of written provisions over subsequent inconsistent oral provisions apply to UNA governing principles. See Principle #9 and Comment 2.

Although the agreement to form a UNA can be quite informal and sketchy, there must be some tangible, objective data such as the use of the organization’s name in communications to its member or third parties, or the existence of a bank account or mailing (or internet) address in the name of the UNA indicating that, in fact, there is an actual agreement.

3. The best reference point for what constitutes a nonprofit purpose is probably the enacting jurisdiction’s Nonprofit Corporation Act. The nonprofit purpose requirement carries with it the implicit understanding that the purpose is not a criminal activity and is otherwise lawful. Each enacting jurisdiction needs to determine whether this limitation needs to be set forth explicitly in the Act.

4. The two–person requirement for forming a UNA is quite minimal, assuming a standard broad definition of person that includes entities of all kinds as well as natural persons is incorporated into the Act (see Cal. Corp. Code § 18030 – “Person” includes a natural person, corporation, partnership or other unincorporated organization, government or governmental subdivision or agency, or any other entity.”) At least two persons are required because that is the minimum number necessary to have an agreement under general legal principles. If one person wants to create a nonprofit organization, it is possible to do so by means of a trust, a nonprofit corporation, or in many jurisdictions, a single member limited liability company.

5. The Act shall apply to all UNAs, whether they be classified as religious, public benefit or mutual benefit or whether they are classified as tax-exempt under the laws of the enacting jurisdiction. Therefore, the Act will cover unincorporated philanthropic, educational, scientific, social and literary clubs, unions, trade associations, political organizations, churches, hospitals, neighborhood and property owner associations, and sports organizations such as Little League baseball teams. If the enacting jurisdiction decides to exempt one or more types of UNAs from the Act, it needs to draft specific provisions listing the exemptions.

6. The terms “members,” “managers” and “governing principles” are defined in Principles 2-4.

Principle #2. The agreement forming the UNA becomes part of the UNA’s “governing principles,” an important term that should be defined in the Act. Governing principles are all the agreements that govern the purpose or operation of a UNA and the rights and obligations of its members and managers. If written, they are usually found in the UNA’s constitution, articles of association, bylaws or regulations. If not covered by a writing, they would be established practices, which should also be a defined term (see Calif. Corp. Code §18010) (“established practices” means the practices used by an unincorporated association without material change or exception during the most recent five years of its existence, or if it has existed for less than five years, during its entire existence.”)

Comments:

1. Principles #26-37 in particular deal with issues that would normally be dealt with in a UNA’s governing principles.

2. “Governing principles” can be oral, written or established by conduct. See Comment 2 to Principle #1. The process for amending general principles will often be set forth in writing such as bylaws. In the absence of a written process or well-established oral course of performance, amendments to the governing principles would be determined by majority vote of the members under Principle #26.

Principle #3. “Members” of a UNA are the persons who, under the governing principles of a UNA, are entitled to participate in the selection of persons who are authorized to manage the affairs of the UNA or in the development of the UNA’s governing principles or policies and have become members pursuant to Principle #35.

Comments:

1. The persons organizing a UNA do not have to be members of the UNA after it is formed, although in most cases they will become members.

2. Persons who do not have the right to select managers or to approve governing principles or policies are not “members” under this Act, even though they may be called or designated as members by the UNA, e.g., individuals whose only connection with the UNA is a gift of money who are listed as members of a group who have given a similar range of gifts.

3. An individual can have policy-making responsibilities in a UNA without necessarily being a member of the UNA. That individual will probably be classified as a manager and managers can, but need not be, members. See Principle #4.

Principle #4. “Managers” are all those persons who have managerial responsibility within the UNA. The term includes directors, trustees, administrators and officers and anyone else (e.g., the minister of a church that is a UNA) who has been authorized to exercise governing, managerial or administrative authority. A manager may or may not be a member of a UNA.

Comments:

An individual is a “manager” of a UNA if the individual fits the definition in Principle #4, even if that person’s designation might usually be associated with another type of organization. Many UNAs refer to members of their governing boards as “trustees.” That designation does not disqualify the organization from being a UNA even though the term “trustee” is commonly associated with trusts, which cannot be UNAs. See Principle #1. Similarly, referring to members of governing boards as “directors” would not disqualify an

organization from being a UNA even though the term “director” is commonly associated with corporations which cannot be UNAs.

Principle #5. A UNA may engage in profit-making activities but any profits that result from such activities must be used or set aside for the UNA’s nonprofit purposes. Comments:

1. Many existing unincorporated nonprofit organizations engage in activities that are intended to produce a profit, e.g., a bingo parlor operated by a church where the profits are used to buy food for a homeless shelter. It is easy to understand why this type of profit-making endeavor should not disqualify the organization from being a UNA if it otherwise qualifies. A for profit activity might endanger the tax-exempt status of the organization or may generate taxable income, but, except as set forth in Comment 2, these are separate issues and should not affect the organizational status of a UNA or the rights of its members and managers.

2. The fact that some or all of the members receive some direct or indirect benefit from a UNA’s profit-making activities will not disqualify an unincorporated nonprofit organization from being a UNA under this Act so long as the benefit is in furtherance of the UNA’s nonprofit purposes. The distribution of any profits to the members for the members’ own use, e.g., a dividend distribution to members, would, however, disqualify the organization from being a UNA because the distribution is not made in furtherance of the UNA’s nonprofit purposes. The organization would be a general partnership, the default organizational form for a for profit organization. An unincorporated investment club that distributes its profits to its members would be a general partnership and not a UNA even though its stated purpose is to educate its members about investments.

Principle #6. As of the effective date of the Act, all pre-existing organizations formed in the enacting jurisdiction that meet the definitional requirements of a UNA are governed by the Act without the organization having to take any action. The Act also applies to UNAs operating in the enacting jurisdiction and in existence prior to or subsequent to the effective date of the Act under the laws of another jurisdiction except with respect to the relations among the members and managers and between the members, managers and the UNA, which are governed by the jurisdiction designated in the foreign UNA’s governing principles, and in the absence of applicable governing principles, by the jurisdiction where the foreign UNA has its main place of activities.

Comments:

1. The first sentence, providing for automatic applicability to pre-existing UNAs, is a standard approach in statutes governing organizational entities. Exempting various types of existing organizations from the new law is not a desirable practice. Because the existing laws governing UNAs are, for the most part, incomplete and the Act may change some of the common understanding of what the law is, an enacting jurisdiction whose standard rule is to have a new statute effective when signed or at the beginning of the next fiscal year after signing may want to have a delayed effective date of 6 or 12 months to provide time to educate the affected organizations and their advisors about the changes.

2. The second sentence covering this Act’s effect on UNAs formed in other jurisdictions is necessary because in all other types of entities, the internal affairs rules of the jurisdiction of the entity’s formation (e.g., the governance rules and duties and responsibilities of the owners and managers to each other and the entity) control; but it is difficult to determine the jurisdiction of a UNA’s formation since it does not, in most jurisdictions, file any public

document upon its formation. Some mechanism for choosing the internal rules jurisdiction is therefore necessary. The default rule is the jurisdiction in which the UNA’s main place of activities are located, which might be defined as the jurisdiction in which the UNA conducts the main part of its operations. A foreign UNA can, however, designate the internal affairs jurisdiction in its governing principles, subject to applicable conflicts of laws substantial contact rules.

3. Since the laws governing UNAs in the enacting jurisdiction govern UNAs formed in other jurisdictions that are conducting activities (except for internal affairs issues in the enacting jurisdiction), a foreign-formed UNA could not conduct activities in the enacting jurisdiction that a UNA formed in this jurisdiction could not conduct, even if the activity were legal in the foreign jurisdiction in which the UNA was formed or conducts its main activities.

Principle #7. A UNA is a legal entity separate and apart from its members and managers.

Comments:

1. The separate legal status of a UNA is a fundamental concept that undergirds all the principles that allow a UNA to hold and dispose of property in its own name and to sue and be sued in its own name and that insulates the assets of the members from claims against the UNA. In civil law countries the separate legal person doctrine for unincorporated entities may not be a radical departure from existing law. In common law countries such as the United States, however, this is a reversal of traditional common law principles that treat partnerships and other unincorporated entities under an aggregate theory.

2. See Principles #3 and #4 for definitions of members and managers.

Principle #8. Once formed, a UNA continues in existence until it is dissolved and its assets have been liquidated.

Comments:

See Principles #38-39 for the rules governing dissolution and liquidation of a UNA. C. The Applicability of Other Law.

Principle #9. Principles of law and equity supplement the Act unless displaced by a particular provision of it.

Comments:

1. This is a very broad principle and an enacting jurisdiction may decide to include specific provisions of other laws that are applicable, some of which are described in the following comment.

2. Examples of other laws that apply are general principles of contracts, agency, fraud, estoppel, the priority of written provisions of an agreement over prior inconsistent oral provisions or subsequent oral amendments (and any exceptions), civil and criminal procedural rules, and rules for enforcing judgments.

3. Drafting conventions as to whether these general principles of law are set forth in separate provisions in an act like this one vary greatly. NCCUSL Acts, as a general rule, do not have provisions other than what is stated in Principle 9.

Principle #10. A provision in a statute in the enacting jurisdiction governing a particular type of UNA prevails over an inconsistent general provision of the Act, to the extent of the inconsistency.

Comments:

Many jurisdictions have existing statutes governing particular types of UNAs, e.g., churches. This principle establishes the rule that in the event of an inconsistency between this

Act and the statute governing a specific type of UNA, the latter will control. Under generally accepted statutory interpretation principles, there is a strong presumption against inconsistency, i.e., the presumption is that the provisions of the two acts are not inconsistent. Therefore, this inconsistency principle will only rarely be applicable.

Principle #11. The Act supplements the enacting jurisdiction’s regulatory laws and rules that are applicable to nonprofit organizations. In the event of a conflict, these other laws and rules prevail.

Comments:

1. Most jurisdictions have statutory provisions giving the chief legal officer of the jurisdiction oversight supervisory powers over nonprofit organizations, including the power to enjoin or prohibit various activities. Most jurisdictions also have statutes that require registration or permits to engage in certain activities, e.g., fundraising from the public, and the filing of reports, e.g., assumed name filings, tax forms, and the like. All of these existing and future statutes, rules and regulations are applicable to UNAs. Whether specific provisions stating this principle need to be included in the Act depends on the enacting jurisdiction’s statutory drafting conventions.

2. A thorough review of all these other laws should be conducted to be sure they do not need to be amended in order to continue to apply to UNAs after the Act is effective. If amendments to these other laws are necessary, they should be included as trailing amendments in the Bill containing the Act.

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