When Should Churches Form Subsidiary Corporations?

When Should Churches Form Subsidiary Corporations?

church-law-when-to form-subsidiary-corporations

When should a church or ministry establish a for-profit corporation?

A church or ministry should never be established as a for-profit corporation, since doing so would prevent the church or ministry from obtaining tax-exempt status. However, a church or ministry may own a for-profit corporation. For example, assume that a church wants to start a restaurant, a fitness club, or some other kind of non-religious or non-charitable operation. Generally, it is not a good idea for these operations to be conducted under the auspices of the church’s non-profit corporation. The non-religious activities could threaten the tax-exempt status of the church and increases the risk of IRS audit. But, the church could avoid these problems by operating the restaurant or fitness club or other non-religious activity through a for-profit corporation which is owned 100% by the church. This kind of corporation is referred to as a “for-profit subsidiary” corporation.

When should a church or ministry establish a second non-profit corporation?

Churches and ministries should consider “spinning off” high-liability religious or charitable activities (such as schools, day cares, and assisted living operations) into a separate non-profit corporation. Doing so helps to protect the assets of the church or ministry from the liability associated with the more risky activity. Why? Because once the risky activity is moved to the new entity, the church or ministry is no longer directly responsible for the activity. Without direct responsibility, the church or ministry is less likely to be held liable for harm resulting from the activity. This measure should be considered especially if the church or ministry has substantial equity in its property, thus making it an attractive target for a lawsuit.

How does a church or ministry avoid losing control over a new corporation?

If the corporation is a for-profit subsidiary, losing control is not an issue, since the non-profit corporation would control the for-profit by virtue of owning it. The owner of a for-profit corporation has the right to appoint the directors and officers of the for-profit or to sell or dissolve the corporation. By contrast, if the corporation is a non-profit the church or ministry may control it through provisions in the new corporation’s bylaws and articles of incorporation. These provisions may grant the church or ministry the authority to appoint or remove the other entity’s officers and directors and/or to consent to or veto the other corporation’s decision to borrow money, purchase or sells major assets, or amend its governing documents.

How separate do related non-profit corporations need to be?

The right to exercise this type of authority should not be confused with the actual exercise of day-to-day control over the operations of the new non-profit. The new non-profit entity should conduct its own affairs though its own employees, directors, and officers. If the founding church or ministry conducts the affairs of the new entity, the law will treat the new entity as a sham, and it will provide no protection against liability. So, the new non-profit should have its own funds, which are not co-mingled with the funds of the founding entity. It should have its own insurance. It should pay its employees from its own accounts. Thus, even though the founding church or ministry retains ultimate authority over the related non-profit, the related non-profit should operate relatively autonomously most of the time.