14 Jun 2011

Facts and Myths about Church and Ministry Incorporation

Founder Raul Rivera

I received a call from very upset Mr. X. (For the sake of anonymity, let's just call him Mr. X.) He was insisting that I shut down my ministry and repent for teaching people the importance of church incorporation. He said that when a church incorporates it deposes Jesus Christ from His rightful position as Head over His own Body.

I must admit, he was overwhelming. He was unwilling to listen to anything I had to say and neither was he willing to allow me a chance to respond...so I just listened. A few minutes later, he ended by saying, "You have been warned . . . repent."

I was flabbergasted. Not knowing what else to say, I only responded at the very end of his speech, carefully treading the moment by saying, "Thank you for sharing that with me." I do not know if he expected debate, but judging by his explosive tirade, I knew that nothing profitable for either of us could result from further conversation (Proverbs 26:4).

It was not the first time I had received a call or a book-long email of that nature and I knew it would not be the last. But something about that call left me wondering about the current state of mind when it comes to church and ministry incorporation.

So, I decided to share with you three facts and three myths that surround the topic of church or ministry incorporation.

Three facts about incorporation

Fact 1: Incorporation provides liability protection.

No one will put more on the line than the founder.

Armed with a vision of winning souls into the kingdom, many men and women of God risk everything they have. But it does not have to be that way.

By incorporating the ministry, state law separates the founder from the dangers of liability lawsuits and misfortunes that could fall on a ministry. Here is how it works.

The laws of all fifty states provide that a corporation is a separate legal entity from its founders and members. This separation creates a legal concept known as indemnification. Under the indemnification rules a board member, officer or founder could not be held personally liable for the debt, liabilities or judgments against the corporation. It prevents the consequence of one member's acts from falling personally upon all the members.

Here is an example:

A children's church volunteer is found guilty of child molestation. The parent's attempt to sue the church, its directors and members. If the church is incorporated, the parents do not have a case against the board of directors or members of the church on a personal level. The parents could only try to hold the corporation liable. If the church is not incorporated, the parents could have a case against the pastor, board of directors (elders) and members of the church.

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Fact 2: The Articles of Incorporation are the church's supreme legal document.

Under state law, the articles of incorporation are the church's supreme legal document. It has greater authority than the bylaws and any other legal document.

Therefore, it is important that you carefully draft the following to best protect your vision and call:

  1. The purpose statement must clearly create a religious (ecclesiastical) corporation that allows the ministry to expand into a wide array of activities. 
  2. A clause that does not allow the articles of incorporation to be amended without the vote and approval board including the founder/president.
  3. A clause that creates membership, but orders the bylaws to provide for the manner of admission and removal. This allows you to carefully draft and amend your church's membership without having to pay money to the state to amend the articles of incorporation.
  4. A clause that establishes the duration of the corporation to be perpetual. I once read that if you want to do something great in this lifetime, then build something that will outlive you for at least 100 years. One thing that incorporation will do is create perpetual existence of the corporation. The ministries of many of our greatest American heroes of the faith still exist today because they incorporated to ensure the continuity of the vision the Lord gave them when they first started. When I think of perpetual existence one name that immediately comes to mind is D.L. Moody.

Fact 3: Incorporation allows the ministry to enter into contracts in its own name.

One of the most wonderful facts of incorporation is that the ministry can enter into contracts, such as owning property in its own name without putting the founder on the hook for any negative results that may occur. Let me explain how this works.

Let's say that Church XYZ signs a three year lease on a building it rents from Landlord ABC. After the third year the church decides to move to another location so it gives the landlord due notice and vacates according to the terms of the contract. However, the landlord is upset that the church is leaving and tries to sue the church. He cannot name the pastor or board members as defendants because the contract is with the corporation. In the sad event that the church has to close its doors and dissolve, the founder and board can do so responsibly without being on the hook for any claims the landlord could make.

Three myths about incorporation

Myth 1: Incorporation of a church makes the church subject to the state and not Christ.

This idea comes from a lack of understanding that a corporation is a separate entity from the true church itself. The true church is the Body of Christ, His bride. The corporation is simply a vehicle we use to engage in business transactions, own property and protect the true church.

A church is free to preach the gospel, its doctrines, and beliefs even if they fly in the face of public policy without any hindrances or fear. The idea that a church is not allowed to preach freely and that it signs a waiver of rights is not founded on truth.

Myth 2: When a church incorporates, it must sign a waiver of its rights to free speech.

There is a myth out there that makes the rounds on the internet that an incorporated church can get tax-exempt status only if it applies for 501(c)(3) status and signs away its rights to free speech.

Why such a myth continues today is a mystery to me. At StartCHURCH, we have assisted thousands and thousands of churches obtain 501(c)(3) status and never once has a church been asked to sign such a waiver of rights. The courts have also clearly ruled on the constitutional protections provided to the church that prohibits government interference with their right to freely worship.

(Recommended reading: "Does a Church Need to be 501(c)(3) Approved?")

Myth 3: Churches are subject to state and federal regulation only if you incorporate.

This is one of the most prominent myths of all when it comes to incorporation.

It is true that there are state and federal regulations that apply, but they exist only when the church does not create the proper clauses in its articles of incorporation to retain control.

For example, many state laws automatically grant the power to control a church corporation to the members unless you include a clause that states otherwise. Sadly, there are some people that believe that a church is never accountable to the state or federal government and that there are not any IRS laws that apply to it.

Perhaps the greatest danger in this belief is the idea that if a church remains unincorporated, it will not be subject to any tax laws such as the withholdings of social security taxes of its employees, its ministers having to pay taxes on the wages paid to them and other unrelated business income taxes.

One church that attempted this is Indianapolis Baptist Temple. The church called itself a free church and therefore did not withhold any social security taxes of its employees. As a result, a Federal court ordered the seizure of its assets to pay its federal tax debts.

In dealing with the audit of churches, section 7611(H)(1)(A) clearly states that the tac code (law) pertains to incorporated and unincorporated churches and those claiming to be churches. This is a direct contradiction to those who believe that a "free" church is immune to any IRS accountability.

How to incorporate your ministry

You may have many questions about incorporation and how it is done. While this requires expert guidance, in essence one files a document that in most states is called the articles of incorporation. This document forges the beginning of your corporation when it is submitted to the secretary of state and stamped filed.

Our newly revised and upgraded product titled "Incorporate" will walk you through the entire process in all fifty states. You simply access it on our StartCHURCH Cloud and follow the directions. Before you know it, you will have articles of incorporation that appear to have been drafted by an expert. This resource even allows you to register in multiple states and also amend already existing articles of incorporation that may be missing some essential components. Click here for more information.

Or, if you are not the "DIY" type individual, then consider utilizing our expertise through the StartRIGHT® Program. You find out more about this service in the link below.

Learn More About the StartRIGHT Program

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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