05 Mar The ‘Inactive’ Association
Whether you’re on Main Street or Wall Street, your corporation must routinely file a business entity form. This form notifies the Secretary of State of the corporation status, the list of current board members and the name and contact information for the registered agent. Failure to comply will initially result in the ‘suspension’ of the business. Eventually, the company will be labeled ‘inactive.’
Even though associations are nonprofit corporations, they are required to complete the SOS documents along with grocery stores and accounting firms. And just like Leo’s Lava Lamp Emporium, a suspension or inactive SOS status may lead to a host of legal problems.
Why should homeowners and investors worry about the filing status of a nonprofit organization? If the corporation no longer exists, it can’t enter into or maintain contracts including landscaping, pool maintenance or insurance. Conducting a meeting, collecting assessments or waiving violations may not be possible.
Homeowners who participate on the board of an inactive or suspended association may no longer be protected by the “rule of law.” Without a duly elected board treasurer, who would approve vendor payments? Contracts signed during the inactivity could be automatically voided.
Now let’s consider that insurance situation more closely. What if a slip and fall occurs while the association is inactive? The insurance company receives the claim and begins to review the data only to find the association became inactive shortly after renewal and is suspended as of the date of the incident. The ramifications to each homeowner in this neighborhood could be staggering.
When faced with an association that is currently suspended, it’s important to determine if it is intentional or accidental. An association that exists solely to maintain a brick entrance monument may not desire to continue. The cost of keeping the association active could be higher than the long-term cost of maintaining the monument. However, an inactive association with a clubhouse, pool and tennis court, all purportedly funded by assessments, is a serious cause for concern. Some investigation would be required to determine the exact situation so owners can consider their possible exposure.
Most of the time, the SOS filing will lapse due to a straightforward oversight. Forms weren’t submitted on time; fees were incorrect. It’s possible to solve this situation by having an HOA representative contact the Secretary of State’s office, submit the appropriate document and pay past due costs.
Determining the status of an association is an important step in the purchasing process. It’s a simple step that helps protect the assets of every owner.