To Inc. or Not to Inc., That is the Question…

      Imagine if there was no incorporation. No registration too. Imagine all the members living in a world, where you were the only one to sue. Imagine all the tot lots seized by creditors and the community welcome sign sold at public auction to Lot 232.

      And dust everywhere…in your clothes, between your teeth, on grandma and sometimes large clouds at night that block out the stars. What’s a homeowner to do? Move to California and pick grapes? No! The answer may be incorporation.

      The really neat thing about incorporation, especially for a condominium that may not “own” any real property, is that you then may be able to access an entire body of law only available before to nonstock corporations and fill all those gaps unaddressed by the governing documents. Additional authority may be tied to extra responsibility. Before jumping in the water, you may wish to check out the nonstock statutes in your jurisdiction.

      It will depend on the judge, but at least an incorporated association can argue that it should be able have the powers that other corporations have and is not wedded strictly to the contract represented by the governing documents. For example, it may able to justify establishing late fees or setting dates for determining what owners can vote because it has the power, as a nonstock corporation, to administer the affairs of the corporation.

      Incorporation is likely to have added importance if a bill sailing through the Virginia General Assembly passes and becomes effective this July 1. A resale packet or disclosure will be considered “unavailable” if the homeowners association fails to incorporate and register with the Real Estate Board. This may be good news if you are assembling the resale packets, but bad news for consumers and those enforcing the covenants.

      The most important reason to incorporate, however, is that it may provide corporate protection against individual liability. Is it like immunity? No, that is reserved for local governments not community associations.

       Lawyers like to say that “piercing the corporate veil” is a “legal term of art.”

Me, I think of a woman on the treadmill in spandex with a belly button ring—but that’s just me. But seriously, imagine serving on the board of an association without the protection of the corporate veil and being exposed to individual liability. It would be like Captain America , charging the bad guys, except no shield, just a man with a tight-fitting suit and little wings on his head. He would be superhero road kill in minutes. Attracting decision-makers of quality to serve on the board, anybody at all, would be difficult.

      There are ways, however, to pierce the corporate veil. The most common reason is that a board member or employee does something personal…some act outside the business of the association. We like to say (another legal term of art); he was on a “frolic” and not entitled to the protection of the corporate veil. Personally, I would like to be on a frolic. It sounds like a day planner for sea otters.

      Example: Employee X goes to inspect a house for preparation of a resale packet, but before he returns to the office, catches the film, “Wild Things”. Is he on a frolic? No, because a further examination of the facts reveals that he is pre-viewing the movie for the association sponsored, “Senior Day at the Movies” and is acting on the orders of the board to determine if this is a wise use of association funds.

      What if the association was initially incorporated, but you’re not sure now? You haven’t received anything from the state in a long time. What’s a lapsed corporation to do? Most states have a process where incorporated associations that fall from grace can be incorporated once again. It is called “reinstatement” and when it is all over, you feel like you have your library card back and you can check out books again. Usually, it involves a bunch of forms, but the toughest part is a personal explanation from the board president. A little humility is a good idea…or blame it all on the previous board.

      I recommend incorporation. It is the board’s garlic and holy water when the homeowners, fangs glaring, come snarling at the gate. But, the corporate veil is not to be mistaken for the invisibility cloak given Harry Potter. It will not make the association disappear when there is a challenge, but it may allow its board, acting on behalf of the association, to confront this challenge without personal risk.