Having restrictions is not ideal for some; however, for some property owners, having regulations is appealing. Homeowner associations or HOAs are both loved and disliked by residents in Texas due to the restrictions they place on a homeowner. Nonetheless, that can be very attractive for developers and those seeking to purchase a new home.
How are HOAs formed?
Before diving into how they are formed, a HOA will be described. Essentially, a HOA is an incorporated or unincorporated association. The association is either owned by or primarily consist of members who are property owners who are covered by the instruments drafted by the association. The HOA manages or regulates a residential subdivision or planned development.
So, how is a HOA formed? In Texas, this process frequently begins with the formation of a nonprofit corporation. Thus, they are a business entity created under Texas law and are registered with the Secretary of State. Not all HOAs are incorporated as nonprofit corporations; thus, the function of those HOAs will not be under Texas law of nonprofit corporations.
Nonprofit unincorporated associations vs. nonprofit corporations
When forming a nonprofit unincorporated association, this is essentially the simplest way to form a new organization. It is an informal process, is not costly and is provides flexibility if the goals or needs of the association change.
In contrast, a nonprofit corporation must be formed through a formal process. A Certificate of Formation must be filed with the Secretary of State and certain requirements, such as the number of directors, voting rights, meeting procedures and the like must be met. Additionally, Texas law mandates certain requirements for recordkeeping and reporting for nonprofit corporations.
Factors to consider
When forming a HOA, you might be unsure about what type of HOA to form. When making this decision, several factors should be considered. First, the length of time the HOA will exist should be established. Next, it should be established whether the group will seek to raise money to fund operations. Third, determine if the association will want to lobby or engage in political activities. Then, consider if the association will receive donations and grants. Finally, establish if the association will engage in activities that could expose its member to liability.
Forming and operating a HOA can be a complex matter. As such, it is important that you are aware of applicable laws and the requirements that must be met.