Monday, January 7, 2008

Volunteer-Managed Associations: Avoiding Traps

I see one of the most visible results of associations being completely volunteer-managed almost every time I encounter such an association: the organization has, either in the past or at present, lost its standing to do business in the state in which it is incorporated (and, therefore, in other states). Oftentimes, the problem is due to the organization's registered agent being a volunteer who has moved or died or is no longer in the business or profession of the Association. In some states, the registered agent must be an attorney and/or must be a resident of the state in wihch the organization is incorporated. Notices to the registered agent that to unanswered can cause all manner of trouble.

Those pesky annual report requirements tend to get lost or misplaced or simply overlooked by volunteers, many of whom do not have any experience in dealing with state reporting requirements. It is understandable that unpaid volunteers with no previous experience may overlook reporting requirements, but that makes it no less important. While it's usually not the end of the world to lose status, failure to maintain currency of standing can be enormously problematic. For example, directors and officers liability policies may become invalid upon dissolution of corporate status caused by failure to file reports. The IRS can get testy if an organization fails to file annual returns. All sorts of state officials tend to bristle at unauthorized conduct of business within state borders.

This is NOT an argument that all volunteer-managed associations need to immediately seek the services of an association management company. I'll readily admit that many of them simply do not have the financial resources to engage a management company, particularly on an ongoing basis. What I will argue, though, is that volunteer-managed associations need to take steps to ensure that they maintain their good standing with state comptrollers and secretaries of state. Here is a simple and relatively painless way to do that:
  • At a predetermined time each year (the beginning of the year often is a good time to start), the Boards of Directors should set aside time to review what filings have been made, what filings are required, and who has responsibility for making filings and reporting back to the Board;
  • If the Board is not organized in such a way as to be sure that such an activity will absolutely, certainly take place each year, a "reminder service" of some sort should be paid for (see below);
  • If the Board does not know what filings are required, a member of the Board should be assigned the task of exploring state requirements. A couple of good places to start looking: 1) the secretary of state's website and the 2) comptroller of public accounts' website. If the information is not readily available or cannot be found there, a call to a CPA should provide a quick answer at little or no cost.
  • Whenever possible, the Board should engage a professional to ensure that appropriate reports are filed, or at least that the Board is notified of the need for filing them. An association management company can be engaged for that purpose at a very low annual fee, as can a CPA or an attorney; for a very basic "reminder" service, the cost should be negligible.

The drudgery of annual reports, tax filings, and the like can cause some people to just ignore them in the hope they will go away. They won't. They will come back to bite the Association, and can do it with a vengenance. Simply ensuring that someone looks into the issue on a regular basis can save the Board from headaches and, in some cases, much worse.