In my role as a complex business attorney, I have had the privilege of working with charities and churches throughout the USA and in many different countries. One of the realities that I regularly encounter is the lack of understanding that, just because an organization is “non-profit”, does not mean that it has no money. Non-profit organizations such as 501(c)(3) tax-exempt entities have major assets and need the same kind of corporate structuring and asset protection as any major corporation.
When working with churches around the country, I have been concerned that many are not incorporated, but are rely
ing either on non-profit religious charities regulations or on their status as “unincorporated associations”. While there are many states that give some protection to an unincorporated charitable association in case of litigation, the fact remains that there are scenarios where liability for the debts or actions of an organization can still find its way to trustees and directors.
In the case of churches, many church leaders have shied away from incorporation out of a misplaced fear of letting government “intrude” into their ecclesiastical world. However, it is that same government that determines both the status of the organization as an “unincorporated association”, as well as the requirement that Trustees hold title to any real property.
In some states, like in Virginia, the same statutes that govern corporations also require the trustees of a church to obtain a court order and permission of the Circuit Court in their jurisdiction, before buying or selling property. This means that: 1) the pastor; 2) the elders; 3) the trustees; and 4) the congregation of a church can approve the buying or selling of property, but it is still going to require the “permission” of the court before the church can enter into the transaction. It doesn’t get more “intrusive” than that!
The solution is to incorporate. Now the legal decisions of the church are handled as prescribed in the bylaws of the church. Those bylaws can memorialize the decision-making process of the church. If the church is “congregational” in its polity, then the members of the church can vote on the matter. If the church is “pastor and/or board led”, then usually the pastor and the board of directors of the church can vote on the matter. In many cases, the bylaws that we draw up are a hybrid of this process, whereby the pastor and the board of directors of the church make most of the day-to-day decisions, but bring big decisions like the buying or selling of property, or the taking on of debt, or the selection of a new pastor to the congregation for a final vote. What is missing? The Court! Now the church matters reside squarely within the confines of the local church and are governed by its bylaws and polity.
The added advantage of incorporation is the protection of the pastor, elders and board from personal liability for routine business matters of the church. Now the church activities are governed by the “business judgment rule” of corporate law. As long as the leaders are acting in the best interest of the church, are keeping themselves informed, and are making decisions based on proper due diligence and planning, there is no personal liability for the pastor, elders, and/or board. Whereas, in many states, liability in an unincorporated association can extend to this group.
In my opinion, incorporating a church makes good corporate sense, good business sense, and good ecclesiastical sense!
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