Nonprofit groups of all kinds, especially churches, often begin their existence as unincorporated associations and only later decide that forming a nonprofit corporation is the right choice for their organization. As part of the decision-making process a nonprofit needs to consider all the important pieces involved in the transition from an unincorporated association to a corporation.
Even if they will serve the same purpose, be led by the same people, and have the same or similar names, an unincorporated association and a corporation are distinct entities for legal purposes. Following the idea of corporate personhood to its conclusion, the two entities can be thought of as two different “people,” each with its own governance rules and obligations. This has a number of important consequences. Here are a few examples:
- The transition must be made in compliance with tax requirements.
A corporation is a distinct taxpayer with its own state and federal tax identification numbers. Establishing the corporation’s tax-exempt status requires its own process. In other words, the unincorporated association’s nonprofit status doesn’t automatically transfer to the corporation without filing the appropriate paperwork. The IRS has rules regarding “successor organizations” that nonprofits can use to simplify the process of ensuring that the prior association’s federal tax treatment passes on to the corporation.
- Transferring assets can require paperwork.
The unincorporated association probably has a range of important assets that will need to be transferred to the new corporation. Third party contracts will need to be assigned, preferably through a written assignment agreement and sometimes requiring the consent of counterparties. The nonprofit’s intellectual property—trademarks such as the organization’s name and logo, as well as copyrighted materials like promotional literature—must be assigned as well. The new entity may also need to open separate bank accounts.
- Migrating employees.
If the unincorporated association had employees those employment relationships will need to be taken on by the new corporation. Nonprofits in this situation are probably already aware of the complex compliance rules that govern employers in California. Important issues like workers’ compensation insurance and other benefits need to be addressed early in the process to ensure a smooth transition. Employees may also need to affirmatively consent to being “reassigned.”
- Get the word out.
Incorporating can also cause a shift in the nonprofit’s branding strategies, as donors, vendors, and others need to be aware of the new entity’s ownership of the organization’s ongoing work. Notifying stakeholders of the organization’s new structure isn’t just important to avoid administrative headaches like incorrectly endorsed checks. It also helps to ensure that the new corporation’s liability protections will apply to the organization’s work in the future.
The Church Law Center of California helps clients with governance questions
The Church Law Center of California supports secular and religious nonprofits at all phases of their organizational lives. If your organization is considering incorporation we can help sort through the details and get the process done the right way. Call us today at (949) 689-0437 or reach out to us through our contact page.