Incorporation of Churches: A New Day

While it is estimated that over 90% of all churches are now incorporated with all states now permitting it, most governing documents are not well drafted, woefully out of date or not followed. Thus, they do not adequately protect the church or its leadership or contain the 21^st century risk management provisions that are now available to churches throughout the country.

Why should a church care about its governing documents and risk management provisions like incorporation? The primary answer to this question is that there is significant change in the legal climate of this country.  Twenty or thirty years ago, most Americans, whether Christian or not, held a common framework of basic moral values such as honesty, fairness, respect for others, self-discipline and accountability.  However, in recent years, respect for these values and qualities have been undermined by a growing emphasis on individualism, diminished respect for authorities, acceptance of relative morality and a loss of common norms and values.  The loss of common values even within the church can cause a great deal of confusion and conflict.  It can also expose a church to devastating losses.  A generation ago, very few people—especially members of the church—would have dreamed of suing the church, but the legal climate today has changed dramatically and lawsuits and claims against churches now are commonplace.  Part of the reason for this recent change is that people have different expectations as to how a church should conduct its affairs and treat its members.  When these expectations are not met, a lawsuit often follows, which can ruin a church spiritually, reputationally, and financially.

As Prov. 22:3 warns, “A prudent man sees danger and takes refuge, but the simple keep going and suffer for it”.  Understanding the absence of common norms and values can pose a threat to the unity and well being of your church.  You are prudent to incorporate but even wiser to develop good Bylaws as a means of establishing common accepted standards for how we should treat one another and govern ourselves as a body of believers.  In particular, incorporation and its governing documents are designed to accomplish the following goals:

1. To prevent surprises and disappointed expectations by providing potential members a thorough explanation of how the church intends to govern itself;
2. To reduce the likelihood of confusion and conflict within the church by establishing clear operational guidelines;
3. To prevent the misuse of authority by church leaders by balancing these powers and establishing procedures that protect members from being disciplined or losing rights without due process and full notice;
4. To reduce the church’s exposure to legal liability by satisfying recently developed legal requirements, even in areas we deny that the state has jurisdiction, and by requiring that potential lawsuits will be resolved by biblical mediation or arbitration rather than through civil litigation.

1. The Benefits of Church Incorporation

Prior to the Falwell case, Virginia and West Virginia were the only two states in the United States where churches and religious denominations could not incorporate.  Thus, Virginia churches were unincorporated associations, which status subjected their members¹ and particularly their leaders, such as the pastors and boards, to all forms of liability and precluded a church’s ability to hold title to its property.  There are many forms of liability where either an insurance policy does not cover the acts upon which a lawsuit against a church is based, or its coverage is limited.  A Board of Directors (elders, deacons or pastors) could be personally liable for the liabilities which were essentially against the church.  There have been cases where a pastor, deacon or elder has suffered greatly due to this unincorporated association status and the imposed personal liability for the negligent or reckless acts of the church or its officers, directors or agents.

The top ten benefits for Church Incorporation include:

1. Incorporation will substantially limit liability of the Pastor(s), Board and members, providing a sure liability shield, provided the church board is not ‘grossly negligent’.
2. Under incorporation, trustees are no longer needed for church corporations and court appointment of such trustees is not required to hold, manage, buy, sell, transfer or encumber real property of the church corporation. Of course, church corporations may still authorize trustees to have that legal authority with the church members’ approval, or it can delegate it to one or more of its officers or directors. Unincorporated churches, however, must comply with all the old law provisions requiring court approval for appointment of Trustees and court approval for all buying, selling, encumbering or transferring land to another entity (other than the new church corporation).
3. Under incorporation, real or personal property for church corporations no longer need to be held by trustees (with its corresponding liability) but can be held in the name of the church corporation or a separate property holding nonprofit corporation.
4. Incorporation often makes it easier for a church to buy, sell, and encumber real estate, operate bank accounts and engage in other business transactions.
5. Incorporation protects the corporate name in the state and eases trade name registration and trademarking the name where appropriate.
6. Intellectual property (copyrights, trademarks and licenses) can be held in the name of the church corporation and not individuals since corporations are legal entities.
7. Incorporation also lends to stability of an organization more so than an unincorporated association, since the members, directors, trustees, and officers of a church may change over the years.
8. Churches must be incorporated in order to receive grants through government faith-based social service provider programs or private foundations.
9. Incorporation and tax exemption can often permit special nonprofit mailing rates and procure discounts from vendors.
10. Finally, most banks and lending institutions prefer to deal with an incorporated entity to assure its governance, purpose and legal status.

However, churches need not be incorporated to be exempt from federal income tax.  However, at least one court has observed that, “while not a pre-requisite for exemption, a showing that an organization seeking a property tax exemption is incorporated as a church or religious association will lend credence to that organization’s claim that it is a bona fide church or religious organization.”

2. Concerns about Church Incorporation.

Other than ill-placed theological concerns about separation of church and state², the primary downside to incorporation may be the upfront costs and requirement that an informational report and nominal fee must be paid annually to the State Corporation Commission or suffer the loss of its non-profit corporate status.  Some commentators have alleged the following other disadvantages of incorporation:

• It requires the re-writing of a congregation’s Constitution and Bylaws to conform to the requirements of the IRS and the State Corporation Commission which could cause dissension since some provisions may be matters of disagreement within a church; however, most church Bylaws are out of date and desperately need updating for 21^st century legal compliance and risk management purposes, as well as streamlining.
• There is a cost to setting up and maintaining the church corporation. Currently, the State Corporation Commission (“SCC”) charges for filing the Articles of Incorporation.  Additional attorney fees from a knowledgeable attorney skilled in church laws and tax exempt entities and knowledgeable about your church government will also be needed to tailor your church corporation’s Articles of Incorporation, and the Constitution and Bylaws. An Annual Report often must be filed each year with the SCC which reflects an updated list of officers and directors..
• A registered agent must be designated to receive service on behalf of the corporation instead of trustees (he or she must be either a member of the State Bar or a director of the corporation); however, a good attorney who serves as a registered agent will have a system for recording all incoming and outgoing mail/faxes and will better be able than lay Trustees to handle legal documents with deadlines and correctly answer complex legal issues.
• Names on bank accounts need to be changed to the corporate name and all property should be transferred to the church corporation (however, it provides much better protection for the church and can be done easily by a knowledgeable church and real estate law attorney).
• Certain rules are determined by statute unless the Bylaws or Constitution provide differently, which good Bylaws will, including:  annual meeting, quorum requirements, notice provisions; use of proxies, terms for directors and officers, removal of an officer by the board of directors, judicial dissolution of the corporation and court ordered meetings of the corporation.
• Inspection of records by members would appear to be governed by the Non Stock Corporation Act, it is debatable whether it can be changed by the Constitution or Bylaws of the church. However, while it can be limited or restricted by Bylaws especially as church corporation under separate church law sections,, most churches make records to members available (except salary information) since they desire to be transparent to its donors and fellow Christian brothers and sisters.
• A church corporation director is liable for failure to exercise “good faith business judgment of the best interest of the corporation.”; however, a leader in an unincorporated association is completely liable for acts of the association.
• Church property is held in the name of the church corporation and not by trustees. Once transferred to the church corporation, it may be bought, sold or mortgaged without court approval. However, simplifying the purchase and sale of property may open the door to the possibility of abuse by church leaders but with limits in good Bylaws it will provide for easier property transactions without the state involvement and court oversight.
• However, the most common reason that churches do not incorporate is “that we have never done it that way before”. However, we have never lived in the 21^st century before with rising liability and changing culture against churches and its leaders.

Over the years, many states have passed several statutory provisions that have tried to protect members and officers/directors of churches from being liable for the negligence of others in a church setting.  Ostensibly, these laws were enacted in order to give churches some of the same protections that churches in other states receive by incorporating when incorporation was disallowed. Here are some examples: 1) No member of a church is liable in tort or contract for the actions of any other member of the church or the actions of the church itself; 2)  Unpaid officers, trustees and directors of certain tax-exempt organizations may have immunity from liability; and 3) The fiscal officer of the church who signs a deed or mortgage on behalf of the church is generally not personally liable on the debt.

Unfortunately, even these provisions are like Swiss cheese when it comes to limiting personal liability and thus, church incorporation appears to be a better alternative and perhaps a “belt and suspenders approach” still utilizing these provisions.

3. Process of Incorporation

While it would be understandable that the state Non-Stock Corporation Act may be applicable,³ since at present there is no special incorporation for religious corporations in some states, one must remember that there is church law sprinkled throughout the state code and in case law history interpreting such church law provisions.  Thus, such non-stock non-profit law will probably only be utilized if the Bylaws, church law provisions and case law do not cover the issue at hand.  However, if a religious corporation law is applicable or some church law statute is present in your state make sure your church is incorporated under that statute for religious liberty protections. Thus, a church’s incorporation should be handled as a church corporation, not a non-profit or non-stock corporation under non-stock statutes, in order to achieve all the church law benefits and protections.

The general procedure for filing the Articles of Incorporation consists of the following steps: (1) preparation of duplicate Articles of Incorporation setting forth the Corporation’s name, period of duration, registered agent and address within the state, registered office address, purposes and names and addresses of the Board of Directors, how they will be appointed/elected and set forth the incorporator(s); (2) signatures of the incorporator(s); 3) inclusion of all IRS required tax exempt language and (4) submission of the Articles of Inc., together with the prescribed filing fee to the State Corporation Commission (SCC).

After approval by the SCC, it issues a Certificate of Incorporation or something similar.  The church’s corporate existence begins at the moment the Certificate of Incorporation is issued.  However, after such a Certificate of Incorporation is issued, the state and common law specify that an organizational meeting of the Board or congregation (depending on church government) shall be held at the call of the incorporator(s) for the purpose of adopting the initial Bylaws and Constitution of the Corporation, accepting members from the unincorporated entity to new church incorporation, confirming new Directors and Officers, authorizing new bank accounts; giving the corporation all authority and power to act and changes to legal documents to reflect corporate status (See my article entitled ‘Power in the Bylaws, Constitution and Policies for Incorporated Churches.’), and such other purposes as may come before the meeting.

After reviewing hundreds of church Constitutions and Bylaws documents over the past several years from many different states, we have concluded it is imperative that a church’s Constitution and Bylaws be reviewed and amended by competent legal counsel knowledgeable in church and tax exempt law for legal compliance, governance changes, updating to conform to current church practice and best practices of risk management. There are too many nuances in church and tax exempt law and too many idiosyncrasies with churches and denominations to believe that a lawyer can just “dabble” in this area of law any longer.

Some of the typical provisions in the Articles of Incorporation will be whether the church corporation is to have members or not, the right of the members to vote, statement of the manner in which directors shall be elected, appointed or designated, amendment provisions, statement of the tax-exempt purposes and limitations, and the powers of the non-profit tax-exempt corporation, as well as a statement of what happens upon dissolution.  While some of these provisions are mandatory and others are permissive, it is essential that a number of the provisions, including the tax-exempt provisions, be strictly adhered to, in order to both protect and promote the corporate and tax exempt status and its powers.

4. Frequently Asked Questions

Q.   Who should serve as the Church’s Registered Agent?

A.   Ideally, the Incorporator and Registered Agent should generally be a member of the state Bar since Virginia Law provides for that qualification and most, if not all, of the documents which will be delivered to the registered agent will be legal in nature. Some documents, such as lawsuits and annual reports, will contain important deadlines that could incur significant liability on the part of the church if not met.  To minimize the chances of important legal papers being lost, the registered address of the church should be a law office or other location with a system in place for recording all incoming mail and facsimiles.  If the registered agent is not a state licensed attorney, he or she generally must be a director of the corporation and the registered address must be the same as the individual’s  state business address.

Q.   What is an organizational meeting?

A.   After incorporation, every new corporation is required by law to hold an organizational meeting at which members join the new church corporation, the Bylaws are formally adopted, officers are elected/appointed, and other powers and policies are authorized for the new corporation and/or officers to conduct the business of ministry. Depending on the form of church governance, upon request, the author will either schedule a phone conference with the client’s directors of the church corporation after the Certificate of Incorporation is received but before the Bylaws and Constitution are redrafted to determine the governance etc. of the church and send a sample agenda and minutes for a congregational meeting to be conducted. Upon request and additional fee, the author’s firm representative may conduct either or both the question and answer meeting with the members and Board and the Organizational Meeting, but that service is generally not needed since this article and sample organizational meeting agenda and minutes are self-explanatory.

 Q.   Who should serve as the Directors of the Corporation?

A.   Typically, it is wisest to simply designate part of all of the Church’s current governing body (Trustees, Church Council, Elders or Deacons) as the Directors of the new church corporation and make the transition in the Bylaws and over years. This avoids extra meetings, confusion and political strife, since it allows most of the duties and responsibilities of the governing individuals to remain the same.

Q.   Is it necessary to revise the Church’s Constitution and Bylaws after incorporation?

A.   Absolutely yes. In incorporating many churches over the last several years, the author has found that all churches’ Constitution and/or Bylaws are either outdated, legally inadequate or inconsistent with the new Articles of Incorporation.  In order to ensure legal compliance, good risk management and clear, best practices for operating the church, Simms Showers strongly advises that a church revise its Constitution and/or Bylaws at the time of incorporation.  Moreover, some revisions of such Constitution and Bylaws can be contentious but incorporation provides an excellent reason to finally solve these problems. “As the Bible says, “you should not pour new wine into old wineskins”.  The organizational meeting provides a good excellent opportunity to adopt these new governing documents and bring your church into the 21^st century and legal and tax compliance with a governing structure that works for the current church moving forward.

Q.   Do most states require an Annual Report after a church is incorporated?

A.   Yes. Every year the State Corporation Commission (or similar state agency) will mail to your Registered Agent an Annual Report form containing the name and address of the corporation, registered agent’s name and address, and the names and addresses of the directors.  Updates to the information on record of the Church can be made at that time.

Q.   Is there an annual fee to keep the Corporation’s status active?

A.   Yes in some states. Currently, the annual fee to remain active with the State Corporation Commission is $25.00 in Virginia and many states.  This fee is submitted along with the Annual Report form by the Registered Agent. However, some states require annual updates every 2 or 3 years and some do not require any corporate filings so you need to check your state law on this subject,

Q.   What is the best way to introduce the new members’ covenant/statement for members of the old unincorporated church?

A.   While church covenants or applications which each member signs are optional to legally enforce risk management provisions, such as Biblical conciliation and church discipline, it is best to get all to sign the document of how we will live together as a body of believers. It is best to treat the Organizational Meeting as a Charter Celebration and have the members sign the members’ covenant as Charter Members. The more positive the process and celebration, the easier it will be received.  Also, explain that the 21^st Century brings new challenges and risks, and the new Bylaws and Member Covenants will best meet the increasing 21^st century risks of the church. We have developed a sample letter for our clients to accompany new Constitution and Bylaws that can be tailored for pastor or church leader to sign and made available to church members to explain why the church is incorporating, changing its Constitution and Bylaws, having a Members Covenant and other legal requirements.

Q.   Do we have to change the legal documents (deed, mortgages, bank accounts, etc.) after we incorporate our church?

A.   Yes. When a church incorporates and becomes its own legal entity, Trustees are no longer required for church corporations to hold, manage buy, sell, encumber or transfer real property and court appointment of such trustees are obviously no longer required. Thus, upon incorporation being finalized (Bylaws and Constitution revised and Organizational meeting held), court appointed Trustees may now transfer real and personal property to the new incorporated church without the need for court approval by simply sending a gift deed for recordation or letter to transfer property to the clerk of the county court where the property is located with instructions to transfer to the new church corporation. See state law for further instructions or contact a knowledgeable church law attorney to help in this process. Beware, however, that the signing trustees are properly appointed by the church and approved by the court and empowered by the unincorporated association thought minutes to transfer the property to the new church corporation to be accepted by the President or Secretary of the new church corporation.  Of course, if there is refinancing or other property issues involved you may want to use the court to approve the transfer etc.

Q.   Is there a detailed process concerning transferring property from the unincorporated association to the new church corporation and is it necessary?

A.   The basic reason is to more fully protect the property and church with the corporate shield. Of course, for more protection many larger churches with net assets worth more than $1 million are creating Property holding corporations/companies with the church being the sole member to separate is major liabilities from its major assets. (SeeChurch and Nonprofit Affiliates and Subsidiaries legal memo for further information). Here is the basic church gift deed process:

• If the trustees have been court approved (signed court order proving appointment) and wiling and able to sign the gift deed then the members resolution authorizing these trustees to transfer to the new church corporation is all that is needed for the gift deed authorization; however, if trustees not approved or are no longer living or in the area able and willing to sign the gift deed, then new ones have to be appointed by the church (consistent with the number under the association Bylaws) and then a petition and order filed with the court authorizing their appointment and approval to transfer property;
• Once that is accomplished one has to research the deeds and land descriptions with the tax id numbers to begin to draft the gift deed(s)( the church needs to make a decision on whether to notify the bank of the transfer although it is not needed under the law);
• After the gift deed(s) IS DRAFTED then the trustees have to sign and get notarized and have the church chairman or president accept the gift; and
• Then the signed and notarized gift deed gets recorded at the county courthouse either by the church or our firm and returned for the church and us to keep a filed recorded copy of the Gift Deed.

Obviously, the cost depends on how much has already been done and how many parcels the church has along with how much title research has to be done by us.  However, a simple gift deed process for one parcel with the resolution and church recording the gift deed generally runs around $500 on an hourly basis but if one has to do the entire process including the petition and order drafting and filing and/or multiple gift deeds it could run considerably more

Q.   Will church incorporation require the church to file for 501(c)(3) tax exempt status?

A.   Absolutely not. Churches that meet the requirements of IRC section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. See IRS Publication – Churches and Religious Organizations Benefits and Responsibilities under Federal Law at www.irs.gov/exempt. Although there is no requirement to do so, some churches seek recognition of tax-exempt status from the IRS because such recognition assures church leaders, members, and contributors that the church is recognized as exempt and qualifies for related tax benefits. For example, major contributors to a church that has been recognized as tax exempt would know that their contributions generally are tax-deductible but vendors and government grant officials may want to see an IRS “tax exempt determination letter”.

Q.   How does a church get started with church incorporation, how long does it take and cost?

A.   First, we have a new church or nonprofit entity client fill out the Church Incorporation Questionnaire and Retainer and submit it, along with the requested documents, both in hard and electronic copy, to Simms Showers, LLP. Presently, churches and denominations/associations who are existing clients receive a reduced fixed fee, while other churches will pay slightly more, plus a filing fee and optional costs for the entire package. The entire process normally takes 2-4 months but it can be expedited in emergency situations or can take longer if the church needs more time to work the acceptance process for the new Constitution and Bylaws, etc.

Q.   Should we separately incorporate more risky ministries, such as childcare operations, schools, motorcycle clubs, social or community service or camps associated with the church and/or separate our valuable property assets from our operations liabilities?

A.   While this is beyond the scope of this article and the author has written extensive articles on this complex question and subjects, suffice it to say that it is generally prudent in the 21^st century to separate your major assets from your major liabilities. However, you also have to decide if you will file it as a separate tax exempt entity with its own 501c3 status or will it come under the church’s automatic tax exempt status through a sole member nonprofit LLC or integrated auxiliary of the church. Moreover, you have to also think of the practical aspects of running multiple organizations with different boards, financials and corporate/tax exempt status.

5. Conclusion

Incorporation provides a great opportunity for churches to revise, update and make its Constitution and Bylaws legally compliant, more workable from a governance point of view and better manage 21^st Century risks. The entire process involves gathering documents and information to draft and file Articles of Incorporation, obtaining the Certificate of Incorporation, serving as Registered Agent, revising the Constitution and Bylaws and working to tailor such documents to church needs, drafting the Member’s Covenant, helping church leaders with the approval process up to and including the Organizational Meeting, providing a sample Agenda and Minutes for that important meeting.

We are prepared to help with any other needs that the church or its related entities may have to help it best serve God’ kingdom and His work.  We are glad to draft the gift deed for transferring property from the unincorporated association to the new church corporation under the new law and with building, land and construction issues with which most attorneys are unfamiliar. We regularly assist in child abuse and sexual offense issues, employment matters, and pre-litigation and litigation/arbitration cases. We have a list of policies and other services that we provide to churches and nonprofits upon request. If the church wishes to retain the author and his law firm to do such work or any other church or tax-exempt law-related work, it may contact him at the email address or phone number below:

H. Robert Showers
703.771.4671

We would consider it a privilege and a pleasure to incorporate any church, bring its Constitution/Bylaws up to date, into legal compliance and using best risk management practices and to help your church or religious ministry in any other way that you need.  We have devised an easy-to-use Church Incorporation Questionnaire so that a church representative can complete it and return it to us with the requested documents, fees and expenses to facilitate this process. Please also feel free to get a free version of our church legal, tax and risk management national newsletter and regular articles on breaking topics in the field at www.simmsshowers.com. 

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Legal Disclaimer:  This Article and related material have been prepared specifically for churches seeking to incorporate in the mid Atlantic states.  It is not meant to provide legal advice or substitute for competent legal counsel that can address specifics of each church.  Any reader is encouraged to seek appropriately trained and experienced professional legal counsel who specializes in tax exempt and church law prior to taking the step of incorporating and redrafting governing documents and policies for legal compliance and risk management. 

1 Under VA Code §8.01-220.13 members of any church, synagogue or religious body shall not be liable in tort or contract for actions of any officer, director, employee or other member of such church solely because of membership.  VA Code § 8-220.1.1 provides some limited immunity for volunteer officers, trustees and directors of 501(c )(3) tax exempt organization and limits liability in some cases for paid Directors & Officers to 1year salary and benefits.

2 Another concern may be the time involved in changing all legal documents (deeds, titles, bank accounts, loans, etc.) to reflect the new incorporation states.  However, the word ‘incorporated” or “Inc.’ does not need to appear as part of the Church’s name, on its stationery, checks, church signs, etc. and at this point a name change to “______ Church  Inc.” will suffice for other legal documents.  Some church leaders also believe incorporation makes a church more liable to government regulation.  Church law expert Richard Hammar disagrees: “That argument fails to distinguish between the church as a corporate entity and the church as the Body of Christ.  Any church that incorporates is not subservient to the state but provides advantages to its members and leaders.” With all the government privileges, protections and rights already accepted long accepted by churches and other religious organizations, such as tax deductibility of donations, no corporate tax, sales and use tax exemptions, property tax exemptions, housing allowances for ministers etc. the argument was ended or severely diluted over 100 years ago to no longer have much, if any, validity!

3 Some comfort should come from the fact that it appears that the Virginia Non-Stock Corporation Act is modeled after the Revised Model Non-Profit Incorporation Act that has been adopted by many states across the country so there is history and interpretation to these laws that add greater understanding when it comes to church disputes and problems under tax exempt corporations that are churches or related entities.