Profit vs non-profit

Started by LarryE3 • 8 replies • 2474 views

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LarryE3 (Colorado)
Posts: 39

Posted:

We are a small HOA in the state of Colorado. The developer set up the Association as a Domestic Profit Corporation rather than a non-profit corportation. Is this the standard way to set up a HOA? Some of the state statutes differ between a profit and non-profit corporation. Is there any advantages to one or the other. The non-profit statutes seems to be less strict in some areas, but I'm not sure if it is even possible (or worthwhile to change).

Thanks. I tried doing a search, but it says the service is not available.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Need to know more about your HOA. Is it one that holds like a golf course or some kind of business? That often holds the difference in being For-Profit and Non-Profit. Most HOA's are non-profit. However, that just breaks down to the HOA just collects what it needs to support it's expenses only. The For-Profit situation may allow a bit more flexibility on that. The profitability not exactly going back into anyone's pockets. It's more of being an owner/sharehholder in a profitable business.

The developer is still in charge so that is a factor. It could be changed later to non-profit when the owners take over. Must be a reason the developer filed this way. Would like to know more.

Former HOA President

NpS (Pennsylvania)
Posts: 4,216

Posted:

There are two major differences between non-profit and for profit corporations:

1. Taxes. While the distinction may be significant elsewhere, there's really not that much of a difference with HOAs. Profits made by non-profits may be taxed. Not-for-profit activities by a For-profit entity may be exempted from tax. In other words, whether it's a for-profit or a non-profit, your tax situation probably isn't going to be much different. You do need to look at the specific activities and determine if they're taxable.

2. Ownership and control. Ownership in the non-profit is communal and a board controls. A for profit does not have these restrictions. The developer can retain both ownership and control - unless there's some contractual obligation (like your CC&Rs).

Therefore, it's critical to understand two things:

1. How and when does control transfer from developer to homeowners?

2. Does the developer retain ownership of anything after control is transferred?

These 2 questions IMO are far more important than the type of entity you have. Find out what your CC&Rs say.

Sikubali jukumu. Read all posts at your own risk.

LarryE3 (Colorado)
Posts: 39

Posted:

Thanks for your replies. Some more specifics.
We are no longer under developer control. Control was handed over last year when the last lot was sold. We are self-managing with an elected Board of Directors.

It is a small community of 16 single-family homes. The only common assets are roads, entrance way, and some fencing. I'm not sure why the developer (from Texas) originally set it up as a profit corporation.

TimB4 (Tennessee)
Posts: 21,062

Posted:

Simply reincorporate as a nonprofit.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By LarryE3 on 04/30/2016 8:51 AM
We are a small HOA in the state of Colorado. The developer set up the Association as a Domestic Profit Corporation rather than a non-profit corporation. Is this the standard way to set up a HOA? Some of the state statutes differ between a profit and non-profit corporation. Is there any advantages to one or the other. The non-profit statutes seems to be less strict in some areas, but I'm not sure if it is even possible (or worthwhile to change).

No, this is not normal or even advisable. I suspect that your developer was an idiot, as most of them are.

The principle difference between profit and non-profit corporations is that with the former you have shareholders who receive a portion of the profits as dividends. In a non-profit, income in excess of expenses does not get distributed to members or shareholders; that money remains in the hands of the corporation.

Before you do anything else, I would suggest obtaining copies of the articles of incorporation and any annual reports that the developer may have filed. (The developer of my association also formed it as a business corporation and filed several annual reports claiming that he owned 100% of the shares of stock.) As things stand right now, your developer may be able to lawfully claim that all funds you pay into the HOA are his.

Do your CC&R's state the name of the association that you must belong to? Do they specify whether the association is supposed to be incorporated and as a non-profit. Is the name in your CC&R's the same as the one the developer incorporated?

The best advice I can give you is to immediately hire an attorney to file the proper articles of incorporation. I do not know whether it is possible to change from a Domestic Profit Corporation to a non-profit corporation merely by amending the articles of incorporation. If the developer has claimed ownership of your HOA you will need to somehow persuade him to give up that claim. You may need to go to court to correct all his screw-ups.

In my state, there is no provision for an HOA to be a business corporation. The statutes require that an HOA be either a non-profit or not incorporated at all.

You have a mess on your hands but the sooner you clean it up the better off you will be.

LarryE3 (Colorado)
Posts: 39

Posted:

I will talk to the Board and see if I can get them to hire a lawyer and get it resolved. Thanks to everyone for your replies. I appreciate sharing your knowledge and time.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By LarryB13 on 04/30/2016 11:38 AM

I suspect that your developer was an idiot

Disagree. Developer may have been protecting his ability to control and own.

But once developer is gone without retaining ownership, doesn't make that much difference.

Whether you are a for-profit or a non-profit, you will be shielded from personal liability.

Since you have no income generating amenities, your aren't likely to have taxable income either way.

If want to go to the bother and expense of converting, it should be relatively easy. A lawyer or CPA should be able to do it for you with little expense. It mostly involves filing a few papers with your State's Department of State and Dept of Revenue plus the IRS.

For example, here's a link to a form that you would file with the DOS:

http://www.sos.state.co.us/pubs/business/sampleForms/CONV_1.pdf

Sikubali jukumu. Read all posts at your own risk.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By NpS on 04/30/2016 5:41 PM

Posted By LarryB13 on 04/30/2016 11:38 AM

I suspect that your developer was an idiot

Developers are idiots. I have known several people who called themselves "developers." They almost always have no money of their own and their favorite phrase is "Other people's money." They have no trouble borrowing millions for improvements and marketing but some things require cash. Lawyers, for example, want to be paid and usually in advance. So the developer does the legal stuff himself. Sometimes they get it right and sometimes they really screw it all up. This looks like a screw-up by an idiot.

The problem with just filing an amended articles of incorporation is that if the developer has claimed in annual reports to be owner of all the stock in the corporation you would need to provide some proof that he has surrendered that interest. The state is not going to deprive him (or his estate) of his property without some sort of due process.

As things stand right now, homeowners who do not own shares of stock in the developer's corporation have no right to vote. That is the way a business corporation works: only stockholders vote.

For-profit business corporations do not have members, so any mention of member's rights or member voting in your governing documents are inapplicable to the developer's corporation.

I do not know about Colorado but in Arizona a business corporation has no lawful means to levy fines, assert a lien, or foreclose for unpaid assessments. Those powers are reserved for associations incorporated as non-profits or for unincorporated associations.

You could sorta solve the problem by just incorporating a new non-profit association. The problem is that your CC&R's require you to be a member of the ABC association and your developer already has that name tied up. So you will have to amend your CC&R's to require membership in the XYZ association.

Good luck with this problem but remember that it was caused by a developer taking the cheap route by doing things himself. Get some good legal advice before taking a stab at trying to fix it yourselves.

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