Should My Church Incorporate?

By Guest Blogger, Attorney David Powers of Powers Compliance, PLLC

Church leaders sometimes wonder whether to incorporate their church. Before discussing the merits of incorporation, it is important to first understand that a church is by default tax-exempt under 501(c)(3) of the Internal Revenue Code. Churches are not required to file an application for recognition of tax-exempt status like other nonprofits seeking exemption under 501(c)(3) of the Code. Instead, the IRS automatically recognizes churches as exempt. But a church may nevertheless seek formal recognition from the IRS by filing Form 1023. In addition, if a church is part of a denomination that has received formal recognition of tax-exempt status, the church may be recognized under the denomination’s Group Exemption umbrella.

Why incorporate?

Advantages of incorporation include limitation of liability and ease of certain business transactions. Both are briefly addressed below.

Limitation of personal liability is a principal reason to incorporate. The default status of a church—if it does not incorporate—is that of an unincorporated association which simply means a group of people who join for a common purpose. An unincorporated association is not a separate legal entity from its members (unless state law declares otherwise). As such, church leadership and members could be held jointly and severally liable for a church debt or in the event of a judgment.

Incorporating provides church members and leadership with a layer of protection. If a church is incorporated, then the assets of such individuals can not usually be pursued for the debts of the church. Likewise, except in cases of gross negligence or willful misconduct, church leadership are generally not subject to personal liability for actions taken in their official capacity.

Incorporation also allows churches to engage in certain necessary business transactions with more ease. For example, it is more difficult (or potentially impossible, in some jurisdictions) for an unincorporated association to obtain exemption from state sales tax. And, unless a state statute governs unincorporated associations, generally an unincorporated church may not enter into contracts or buy or sell property in its own name.

How to incorporate?

A church must file articles of incorporation with the appropriate state agency (generally the Secretary of State). The state agency will likely have a template form, but it is usually preferable to prepare your own articles because the template form will often not have all recommended provisions, including ones required by the IRS if seeking formal recognition of exempt status. After incorporating you will want to prepare additional corporate documents, including bylaws to govern the procedures of the new corporation.

Church leaders should consult denominational bylaws, if any, before incorporating to determine if any steps must be taken before deciding whether to incorporate. After incorporating, most states require an organizational meeting to ratify the articles, adopt the bylaws, vote on officers, and conduct other organizational business—this will be accomplished through a congregational meeting or a meeting of the directors (or via written consent), depending on several factors.

This material is provided for informational purposes only and not for the purpose of providing legal advice. Should you need assistance, please contact Auxilio, or an attorney if you need legal counsel.