HOA conversion from an LLC to a nonprofit corporation

Our HOA is located in North Carolina. When we were formed 10 years ago after the declarant went bankrupt, the folks on the first HOA board naively filed to create our HOA as a for profit LLC. However, North Carolina law clearly says that an HOA must be a nonprofit corporation. Years later, when we looked to hire a management company, all of the companies we consulted with said we need to become a nonprofit corporation before they would represent us. They had us talk to a couple of lawyers, who all advised us that as a for-profit corporation we were not a mandatory HOA, but rather a voluntary one.

Unfortunately, we were told that the conversion from a voluntary to mandatory HOA would require 100% of the vote of every property owner, and that anyone of those owners could hold the process hostage. You hire a lawyer who tracks down all the owners and works with them to get them to agree, and that can be many of thousand dollars and take quite a bit of time. Our HOA does have typical community resources, including a community septic, so that kind of seemed like the ticket to get people to sign. However, there’s many undeveloped lots and maybe those people wouldn’t be so eager to pay dues if they didn’t have to.

Despite being a voluntary HOA, none of the property owners besides board members ever knew this was the situation. We’ve been operating like a typical HOA normally would, collecting dues, electing officers, running a budget, etc.. We’ve also filed liens on properties for nonpayment of dues and have assessing fines for late fees and various neighborhood violations.

Fast forward. The current board went ahead and signed us up with a management company that didn’t mind our legal LLC status. One of the things they did was have us make the previous LLC defunct and create a new nonprofit North Carolina corporation. Very few property owners, limited to only former board members realize what was done. No vote was taken, it was just done.

Does anyone else have experience with this and what the long-term ramifications are? I feel like if a neighbor had a beef with the HOA, they could fight it legally in court, and accuse board members of some nasty legal violations. Unfortunately, if that happened, it could wreak havoc in the neighborhood and everyone could throw the CCR out the window and do what they want. Thus, for those of us that are aware of the situation, it seems best to keep this under wraps. This was done recently, but maybe there is a statute of limitations that will apply in the future?

MarkC25, I read your post carefully.

If I were researching this situation, and based on a lot of legal experience with HOAs and land use law over the last 15 years, the first thing I would want to see is what the Declaration of CC&Rs says. It is this latter document that is going to identify whether this is a mandatory HOA or a voluntary HOA. It is the Declaration of CC&Rs that legally binds one owner to another. Legally and at this forum: "Covenant" is another word for "contractual term." Covenants are normally recorded with the county. Such recording serves as "public notice" to all that this "contract" exists. Meaning if one buys a lot in the community to which the covenants applies, one has agreed to abide by the covenants.

Your focus on whether this is a corporation or LLC, or converted from one to the other, is, so far IMO misplaced.

I have doubts the attorneys said what you say. It is possible that instead, what these attorneys meant is that this association (call it a HOA; call it a company with members; call it a corporation; whatever) might not be subject to the NC HOA statute on account of xyz.

If you want substantive answers on this, redacting identifying information from the Declaration and posting it here would be best. Attachments under 200 kilobytes are allowed.

Here is an article on the differences:

LLC Vs. Corporation an article in Forbes.

Since you were initially incorporated as a "for profit LLC" I would expect that there may be tax differences.