In today’s economy, churches and nonprofit organizations face many of the same challenges as for-profit businesses. Increased regulatory scrutiny, decreased donations due to inflation, aging memberships, and declining spiritual engagement have led many churches and nonprofit organizations to consider merging.
While church mergers are becoming more common as congregations seek growth, sustainability, or solutions to financial strain, the process involves complex legal, financial, and governance issues. If your organization is considering a merger, it is highly recommended that you consult with an experienced church and nonprofit lawyer who can guide you through this process and help negotiate the best possible outcome.
What Are the Most Common Types of Church Mergers?
Researchers have identified four main types of church mergers, each arising from unique circumstances:
- Generational Merger: An older, more established church merges with a smaller or newer congregation to share resources and revitalize both ministries.
- Consolidative Merger: Two or more churches merge under a stronger, often larger, existing church’s leadership and identity.
- Coalescing Merger: Two or more churches unite to form an entirely new, distinct church entity.
- Redeeming Merger: Two struggling churches merge with the hope that the combined resources and renewed mission will lead to stability and growth.
Each type of merger presents unique legal and operational challenges that must be carefully reviewed before proceeding.
The Importance of Due Diligence in a Church Merger
Due diligence plays a critical role in church and nonprofit mergers. It ensures that both parties fully understand the financial, legal, and operational aspects of the transaction before moving forward. This process helps identify potential risks, liabilities, or incompatibilities that could affect the merger’s success.
During due diligence, the following areas are typically reviewed:
- Governing documents, including the constitution and bylaws.
- Financial statements and records.
- IRS Form 990s and/or audited financial statements for the past three years.
- IRS filings and tax-exempt documentation.
- Contracts and vendor agreements.
- Real estate deeds, leases, and property records.
- Employment and volunteer policies, including handbooks and child protection measures.
- Marketing and outreach materials, including website and social media content.
- Licenses and permits.
- Past, pending, or potential litigation and disputes.
- Details on debts, liabilities, and outstanding obligations.
- Membership data and indicators of organizational health.
- Statements of faith, vision, mission, and core values to assess compatibility.
A thorough due diligence process allows leadership teams to make informed decisions and avoid unforeseen legal or financial problems after the merger.
Why Should a Church or Nonprofit Consult with a Lawyer?
All religious institutions are considered nonprofit entities, meaning they are subject to specific business, tax, and accounting standards. A knowledgeable church and nonprofit lawyer can serve as a trusted advisor and assist with the following matters:
Planning a New Church
When establishing a new church, leaders must address critical legal and administrative issues, including tax status, financing, property acquisition, and compliance with nonprofit laws. A church and nonprofit lawyer can:
- Secure the necessary documentation to become a nonprofit entity.
- Obtain federal tax-exempt status.
- Establish a Federal Employer Identification Number (FEIN).
- Incorporate with the state.
- Ensure full compliance with federal and state nonprofit regulations.
Employment and Personnel
Churches should maintain clear policies for employees and volunteers. A lawyer can review and draft employment agreements, volunteer policies, and compensation guidelines while ensuring compliance with wage and labor laws. This includes setting clear standards for pastors, ministers, and other church leaders.
Accounting and Financial Compliance
As nonprofit organizations, churches must follow strict Internal Revenue Service (IRS) reporting and accounting procedures. A church and nonprofit lawyer can:
- Assist with financial oversight and compliance.
- Respond to IRS inquiries or audits.
- Review investment portfolios to ensure they align with fiduciary standards.
- Examine contracts and financial agreements for compliance.
- Review structures for social services or revenue-generating activities to ensure legal separation from church operations.
- Conduct internal investigations into financial or ethical concerns.
- Ensure compliance with charitable solicitation and fundraising laws.
- Advise on intellectual property rights for sermons, music, art, or educational materials.
Crisis Management
If a church faces accusations involving financial misconduct, abuse allegations, or other sensitive matters, an experienced lawyer can help develop a crisis management plan that protects the church’s legal and reputational interests.
Ministries and Liability
Churches that sponsor ministries or community programs should understand the potential liability involved. A lawyer can provide guidance on risk management, insurance coverage, and legal compliance.
Conflicts of Interest
When church activities benefit a leader, member, or associated party, potential conflicts of interest may arise. Legal counsel can help establish appropriate disclosure and governance policies.
Litigation
If a church, leader, or volunteer faces a lawsuit or other legal challenge, a church and nonprofit lawyer will provide skilled representation in negotiations or in court as necessary.
Virginia Church and Nonprofit Lawyers at Anchor Legal® Assist Clients with Mergers
Churches and nonprofit organizations often face the same legal complexities and potential disputes as other entities. Our experienced Virginia church and nonprofit lawyers at Anchor Legal® help clients navigate the intricate legal, financial, and governance issues that arise in mergers and organizational transitions. To schedule a consultation, call 757-LAW-0000 or contact us online. We are located in Virginia Beach.