Nearly every religious organization faces the question of whether to become incorporated at some point. This question typically arises when considering legal liability. Liability in unincorporated churches and religious organizations is placed on the organization’s members or congregation, which oftentimes can be quite problematic, particularly in smaller organizations with little capital or assets.
Incorporating protects congregations and members from personal liability, determine the entity’s governance, establish bylaws and order, and can be an effective way of increasing and sustaining ministries. While unincorporated churches and ministry organizations who meet the United States government’s definition of a religious entity for non-profit status, they cannot be considered for tax exemption without being formally organized, which is best achieved through incorporation.
Obtaining corporate status may be advisable for some churches and not others, so it is best for church leadership and congregations to know the facts and requirements of becoming incorporated before making a formal decision.
What Are the Benefits of Incorporating?
When a church is unincorporated, its members are personally liable for activities that take place in the church, the actions of other members, debt obligations, contractual misrepresentation, personal injuries, legal matters, and sexual misconduct. This means, for instance, that if an individual is injured on church property, every member can potentially be sued for damages. Additional benefits of incorporating include:
- Legal liability: One significant benefit of incorporation is that members are not held personally liable in potential lawsuits. Incorporating provides church members and leadership with protection from legal liability through a process known as indemnification. Once incorporated, the church becomes a corporation under state law, however, members will continue to control all church activities. To achieve indemnification, the church must demonstrate that the board of directors and pastor serve as leaders on behalf of the church and do not solely act in decision-making processes.
- Church finances: Under incorporation, a church greatly increases its financial resources. Banks often consider incorporated churches as more financially accountable, making it easier for a church to secure loans and financing.
- Non-profit legal entity: Incorporation designates the church as a non-profit legal entity, which then allows the church to transact business, including borrowing, owning, and transferring property without having to petition the court.
- Expand community outreach: Incorporation helps the church receive charitable donations, as businesses and corporations are more willing to donate to non-profit organizations for tax purposes.
How Does a Church Incorporate?
The process of starting or incorporating a church is quite similar to that of starting a business, though there are some key differences in creating for-profit and non-profit organizations. Laws regarding incorporation of churches may vary by state, but generally, the following are the basic steps of ecclesiastical incorporation:
Obtain consent: Determine that the church leadership and congregation support incorporation. Typically, this begins with church leadership voting whether or not to incorporate and, if passed, the question be taken to the congregation for a general vote.
Appoint an incorporator: Identify who will serve as the incorporator to oversee the paperwork and filing throughout the incorporation process. The incorporator does not have to be a member of church leadership, and many churches retain an attorney for this role.
Designate a registered agent: An agent is an individual or entity with a physical state address who can legally accept official mail and notices on the church’s behalf. Some states allow the church to act as its own agent and others require appointing an alternative representative, such as an attorney, or a business service to act as the registered agent.
Create Articles of Incorporation: The most important step is to create the church’s articles of incorporation, which details the creation of the church and describes the activities, responsibilities, and governance of the church once incorporated. This written document is necessary in order to qualify for federal tax exemption as a non-profit organization. The church will be required to file the articles with the state and federally with the Internal Revenue Service (IRS). Many states offer articles of incorporation templates, usually in a fill-in-the-blank format, to make the process easier.
To qualify for exemption, the articles must also state that the church’s activities are limited only to the purposes defined in IRS Code 501(c)(3) to meet eligibility as a non-profit organization. These statements must also be included in the following step, bylaw creation, but must be stated in the articles as well. Not doing so will not meet the IRS requirements for non-profit status.
The articles of incorporation must state the name of the new corporation, the name and address of the registered agent, the nature of the non-profit organization and its purpose, and its bylaws detailing how management and organization of internal affairs will be conducted. For the corporation purpose, the IRS requires specific language for approval and must contain the following:
- Purpose clause: This clause states the reason the church seeks incorporation and details the organization’s scope of activities, organized and operating exclusively for religious purpose. Additionally, the purpose clause for churches must contain the legal wording “religious, charitable, and educational,” as detailed by the IRS to be compliant.
- Dissolution cause: This clause details where assets should be allocated in case there is a dissolution of the church, after all of the church’s debts and liabilities have been paid. Per law, all assets and money of a non-profit organization must be provided to another tax-exempt organization and cannot be directed to an individual or group of people.
- “No / Not” clause: Articles of incorporation should include non-profit language statements that it will abide by the IRS tax-exempt standards. These statements are typically written as “The church will not,” or “The church will not allow.”
Non-profit language in the purpose and dissolution clauses is known as “organizational test requirements” and demonstrates to the IRS that the church meets the 501(c)(3) requirements. In fact, the IRS will not accept applications until the language is included. Though states do not generally require the same language, but it is advantageous to include it if filing the state application before the federal. If not included, the church may need to file additional articles of amendment in order to incorporate the organizational language, which causes lengthy delays and higher costs.
File the articles of incorporation: Once completed and signed by the incorporator, the articles of incorporation must be filed with the Secretary of State, along with the registration fees. Some states may require county-level approval as well. Once approved by the state, the church becomes a non-profit organization and may begin operating as a legal entity, open bank accounts, receive donations, and other business matters.
Obtain the FEIN: Once recognized as an official corporation, the church must apply for the Federal Employer Identification Number (FEIN) with the IRS. The FEIN will be the church’s identification number for banking, credit building, and tax filing.
Are There Drawbacks to Becoming Incorporated?
In the majority of cases, the benefits generally outweigh the disadvantages, but there are a few things to consider when determining whether the church should be incorporated, such as:
- Political support: Under 501(c)(3) non-profit requirements, the church can lose its tax-exempt status for supporting political candidates, which some members may view as a free speech forfeiture.
- Government control: Becoming incorporated does give a certain measure of control to the government, which some members may view as violating the separation of church and state. Incorporation, however, allows the church to be more credible within the community and raise funding.
When determining whether to incorporate, churches must consider whether either of these conditions outweigh the church’s long-term goals that may benefit from incorporation.
Virginia Beach Church Law Attorneys at Anchor Law Group, PLLC Assist Churches and Ministry Programs Obtain Incorporation
If your church’s congregation is considering incorporation and establishing non-profit status, the Virginia Beach church law attorneys at Anchor Law Group, PLLC can help. Our legal team has years of experience assisting churches with developing articles of incorporation, serving as incorporators or registered agents, and filing with the state and federal governments. Call us at 757-LAW-0000 or contact us online to schedule a consultation. Located in Virginia Beach, we serve clients throughout Chesapeake, Norfolk, Suffolk, Portsmouth, Newport News, Hampton, and Eastern Shore, Virginia. We also serve our clients throughout the United States through our network of associated attorneys.