Charities and non-profit organizations are often faced with the question of whether to incorporate. Some decide that it is not worth the trouble, while others put off the decision until the organization grows in size. There are also those that do not consider the question at all. While members may have the best of intentions, a lack of forethought can have catastrophic outcomes. Any charity or non-profit organization that exists as an unincorporated association is well-advised to consider the benefits of incorporation. Existing as an unincorporated association is a poor choice for most charities and non-profit organizations for two reasons: (1) they lack a separate legal existence apart from their members, exposing their members to personal liability; and (2) with the exception of Quebec, they are not by governed by legislation in the Canadian provinces, making good governance next to impossible without a robust written constitution.
To explain the drawbacks of unincorporated associations and the benefits of incorporation, this article will examine their key differences. Next, it will review the Canadian case law that has considered the legal status of unincorporated associations, or lack thereof, to explain how courts have dealt with the absence of governing legislation. Finally, it will advocate for robust legislation governing unincorporated associations, and will provide best practice recommendations for good governance to avoid the pitfalls of this organizational structure.
It is not unusual for startup organizations to be attracted to the concept of an unincorporated association, since unincorporated associations require little effort to create and are less costly to run than corporations. In fact, it is not uncommon for people to form an unincorporated association without even being aware of it. A group of individuals can establish an unincorporated association simply by coming together and engaging in activities in furtherance of a common goal or for the benefit of an ostensibly defined group. Common forms of unincorporated associations include non-profits, such as golf clubs, social clubs, and neighbourhood associations, but can also include registered charities, comprising of members who seek to further a common charitable mission. An unincorporated association is the default form of a non-profit organization that is not established as a charitable trust or non-share capital corporation.
There are two main benefits of carrying on business as an unincorporated association: (1) their structure is flexible, as they are not governed by a statute in most provinces; and (2) there are no statutory corporate filing obligations. It is not unusual for small associations with no property to remain unincorporated for many years. However, an association that has a large membership or that wishes to generate revenue and hold property should consider incorporation. Small organizations that anticipate growth are also advised to incorporate sooner rather than later. While incorporating and attending to statutory filings may appear burdensome, the efforts may be well worth their cost.