Many churches across the country are experiencing declining membership and financial hardships, made worse by the coronavirus pandemic in some instances. As a result, an increasing number of churches are turning to merge with other churches to consolidate their missions, finances, and properties for longevity and success. Church mergers are often implemented for missionary purposes, an opportunity to grow alliances within their communities, and increase in congregations.
The merging of churches is becoming more commonplace for many reasons that generally benefit all congregations involved. There are many ways of consolidating, but there are three main ways churches merge:
- One church merges into another: In this scenario, the assets and liabilities of the first church are transferred to the second, known as the surviving entity. Tax laws governing exempt organizations such as churches prohibits transferring church assets to an individual and can only be transferred to another tax-exempt organization with similar missions. This type of merger is generally optimal when the first church is smaller and holds less assets than the second church.
- One church dissolves: In this scenario, the first church dissolves and leaves all assets to the second church. This action requires an asset purchase agreement outlining all of the first church’s assets and liabilities and a completion date for the dissolution. This is a less complex merger, as no debts and liabilities are transferred to the second church, however, most states require the attorney general and creditors to be notified before any entity can legally be dissolved. This may be the best option when the first church has few or no liabilities and liquid assets.
- Both churches dissolve: More commonly known as a consolidation merger, this option sees both churches dissolve and become a completely new entity and viewed as a fresh start for both congregations. This option is frequently utilized when both churches have extensive histories and want to preserve some of their history and identity within the new organization.
Once both churches have determined a desire to merge, the next step is drafting a Memorandum of Understanding (MOU) detailing the structure of the emerging new church that both parties agree upon.
An MOU guides the merger process and protects all parties from misunderstandings for a more seamless joining of the two organizations.
Detailing the history of both churches and the decisions leading to the merger to provide a true account of how and why the merging of both churches is necessary. Oftentimes, mergers are seen as a hostile takeover by the larger or stronger church in the agreement. Providing a clear history of how each arrived at the decision to merge for the betterment of both organizations helps eliminate some of that sentiment amongst both congregations.
A statement demonstrating the process of how each congregation will adopt the merger. It is crucial to outline how each of the congregations will execute the agreement terms following the merger, as both churches likely have different bylaws and practices before the merger.
Include an overview of the merger process, clarifying each step. Details should include the new church’s location, staff changes, voting, threshold, and transfer of membership, property, assets, and liabilities. If possible, include a timeline that starts with the MOU approval and ends with the first service of the new merged church.
Describe the newly merged church, including which former church will remain and which will dissolve, along with the distribution of assets of the dissolving organization. Additionally, ensure that the surviving entity’s officers have the approval of the newly formed church, identifying the officers of each organization, which may include a president, secretary, and treasurer. The laws of each state dictate how officers are registered and recorded, but this is a crucial detail to reconcile prior to the merger, especially if either church no longer has officers.
In naming the new church, work with the secretary of state to obtain the current legal and fictitious names of both churches, as they may not match the common name as seen on each church’s signs. Legally acquiring a name change typically involves an amendment to the articles of incorporation with the secretary of state as well.
Outline the new organizational structure of personnel in the new church, including names and positions of all staff. This typically includes a senior pastor, associate pastor, and office personnel, and any other necessary positions.
Describe the leadership of the new entity. The constitution and bylaws of the surviving church will be enforced following the merger, and if only a portion of the leadership of the surviving church is retained or augmented with other, a detailed passage acknowledging such is necessary to include. Provide clear explanation of who will serve on the governing body and when this takes effect following the merger.
Upon completion of the merger, the new church will hold all assets and liabilities of both organizations. Include information regarding the fiscal year, timing of reviews and audits, and a commitment to following the generally accepted accounting principles (GAAP). This section should also include the allocation of costs related to the merger, such as legal and accounting services, consulting fees, filing fees, and more and would be shared between the two churches.
The merging of two churches affects the ministry of each. Detail which ministries will remain, be added, or removed once the merger is complete. Notify non-profits and missionaries supported by each church that funding structures may change following the merger and include which of these organizations will remain or be removed from the new church financing and budget.
Dissolution of Merger
Outline a clear strategy of what will happen should the merger ultimately fail. Include how a failed merger affects employees, real property, remaining assets, and conditions per the sale of the property.
It should be noted that before any agreements and documents are signed, the need for each church to perform its own due diligence is crucial before proceedings begin. Due diligence is the process of closely examining the legal and financial positions of each church involved in the potential merger, similar to an audit, to discover legal due diligence and financial due diligence.
Legal Due Diligence
Each organization conducts a comprehensive examination of the other’s legal status, articles of incorporation, risks, contracts, Human Resources (HR), benefit programs, real estate ownership, and legal claims and current or pending litigation.
Financial Due Diligence
Not as comprehensive as a financial audit, a due diligence review examines each organization’s past audit reports to gain an accurate understanding of the current financial positions of each church.
Due diligence should never be neglected, and it is key that each congregation have a neutral third party for this endeavor. Typically, attorneys handle the legal due diligence and accountants the financial review.
It may also be prudent at this stage to develop a premerger confidentiality agreement prior to serious discussions of the merger begin, and possibly a written nondisclosure agreement for key staff members involved in early discussions.
What Are the Benefits of a Church Merger?
Combined churches can benefit from the following:
- Stable senior leadership, particularly if one of the churches previously lost a senior pastor or leader.
- Larger congregation, particularly those that were experiencing dwindling attendance.
- Increased racial and generational diversity among the congregation.
- Increased programming opportunities.
- Larger campuses or additional locations.
- Increased revenue, funding, and assets.
- Greater visibility within the community or state.
- Additional resources for repairs and renovations.
As many churches age, expanding demographics by merging with younger churches and introducing younger church leadership allows the older organization better opportunities of longevity and growth. Along with younger members, many churches report the added benefit of merging also broadened racial diversity amongst the congregations as well.
Church Law Attorneys at Anchor Legal Group, PLLC Work With Churches Interested in Merging Congregations
A church seeking to merge with another to solidify their mission will need legal assistance. Our church law attorneys at Anchor Legal Group, PLLC are available to work with your organization through the entire process. Call us today at 757-LAW-0000 or contact us online to schedule an initial 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.