HOA Legal Structure

Started by RhondaN2 • 7 replies • 1671 views

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RhondaN2 (Louisiana)
Posts: 4

Posted:

Our HOA was created by the developer about 20 years ago as an S corp. I would like to know what the pros and cons are associated with this structure. It seems that an NPO would make more sense. I am not sure if we should change the structure.

There are 50 homes in the subdivision and the HOA owns about 6 acres of common ground, a large fishing pond/ fountain and the brick entrance.

Thank you in advance.

TimB4 (Tennessee)
Posts: 21,059

Posted:

I'm not an attorney and I do not work in the legal profession. I suspect that the issue is based on the different tax advantages. You will likely need to see an attorney versed in corporations and taxes to find out which type of corporation is best for your Association.

See:

Business Comparison Chart by the company corporation.

Legal Zoom Two Types of Corporations

IRS Business Structures webpage

Comnparing Company Types from Biz Filings.

Personally, based on my very limited understanding of this issue, I agree with you.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Rhonda,

This is a very unusual situation and I suspect that the developer filed all the corporate papers without any input from an attorney.

A sub-chapter S corporation is for a small for-profit corporation. Under sub-chapter S the profits or losses from the business may be distributed to a small number of stockholders without paying corporate income tax. Those who receive the distributions then report it as income or loss on their individual tax returns.

Most HOA's are incorporated as non-profits. Sub-chapter S does not apply to non-profits.

Is the developer still somehow involved with your HOA? If so, he may be using your assessments as a source of his personal revenue. If he is not involved, how on earth do you file tax returns?

RhondaN2 (Louisiana)
Posts: 4

Posted:

The developer is long gone. Our long term treasurer moved recently and we are trying to follow the same template she has followed but I am thinking that it may not be right. In the past there have been no income distributions and the association pays taxes due. I have been trying to determine what possible benefit there is to maintaining this structure, if we are doing it wrong and if changing to an NPO would be worth the trouble.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By RhondaN2 on 03/26/2014 8:24 PM

I have been trying to determine what possible benefit there is to maintaining this structure, if we are doing it wrong and if changing to an NPO would be worth the trouble.

Well, it appears that you are asking the right questions. The next step would be to ask those questions to an attorney versed in corporate and corporate tax law.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By RhondaN2 on 03/26/2014 8:24 PM
In the past there have been no income distributions and the association pays taxes due.

If you are organized properly (as a non-stock, or non-profit, or a not-for-profit corporation, whatever is appropriate for your state) there should be no taxes due unless you are receiving more than $100 in income each year that is coming from somewhere else other than assessments from your members.

Your developer (or his attorney) apparently didn't know what they were doing when they organized your HOA.

You need to reorganize and apply for new federal and state tax IDs (for federal you will need an EIN). You can't use your old tax IDs if you reorganize.

RhondaN2 (Louisiana)
Posts: 4

Posted:

Thank you for your responses. It helps so much.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Rhonda

Bruce said your developer/lawyer might not have known what they were doing. It makes me wonder if they did know what they were doing and have something up their sleeve.

I would have the association getting some legal advice about the type corporation ASAP.

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