Have you ever wondered whether you should start a new corporation? Maybe you’ve just founded a church or just started itinerating on a regular basis. Or, maybe you are launching a major new initiative for an existing church or ministry. Let’s look at some commonly asked questions concerning why and when to form a new corporation.
What are the Benefits of Forming a Corporation?
The most significant benefit of forming a corporation is liability protection. A corporation assumes the liability that its members and leaders would otherwise face. For example, let’s say a guest at an unincorporated church falls down and breaks her hip. Who is liable for the injury? Certainly, the owner of the property might be liable. But, it may be surprising to learn that the leaders of the church and even the members of the church may also be held personally liable for the injury.
By contrast, if the church is incorporated, the corporation—not the leaders or the members—would typically be liable for the injury. Thus, the corporation assumes the liability which would otherwise be assessable against the individuals.
Similarly, a corporation can enter into contracts. Without a corporation, the minister may find it necessary to borrow money or enter into contracts for the ministry in his or her personal capacity. Although banks often require ministers to personally guarantee loans to ministries, a personal obligation will always be required if the ministry has not been incorporated.
Corporations also have perpetual existence. They don’t die, get sick, or move away. So, conducting church or ministry operations under the auspices of a corporation allows for the ministry’s real estate and finances to be held and used for religious and charitable purposes forever, despite what may happen to the original founders or leaders over time.
Also, the use of a corporation is often required in order to ensure the tax deductibility of donations. The IRS permits unincorporated churches to receive tax-deductible donations as long as the church is formed as an association, with a formal governing structure. However, unincorporated entities which are not churches are not permitted to receive tax-deductible contributions and must usually pay state and federal income taxes on the donations they receive.
What Type of Corporation Should I Form?
The type of corporation to form depends on the type of activities you intend to conduct through the corporation. Churches and ministries should be formed as nonprofit “C Corporations.” Corporations intended for business activities should generally form as for-profit “C corporations.”
Subchapter “S” corporations have little application in the world of religious organizations and should usually not be used. Limited liability companies (an “LLC”) may be used to conduct joint ventures between nonprofit corporations or when a nonprofit corporation desires to “spin-off” certain nonprofit activities into an entity owned by the nonprofit.
When Should a Church or Ministry Establish a Second Nonprofit Corporation?
Churches and ministries should consider “spinning off” high-liability religious or charitable activities (such as schools, daycares, and assisted living operations) into a separate nonprofit 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 nonprofit 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 nonprofit, 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 sell major assets, or amend its governing documents.
How Separate do Related Nonprofit 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 nonprofit. The new nonprofit entity should conduct its own affairs through 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 nonprofit 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 nonprofit, the related nonprofit should operate relatively autonomously most of the time.
If you need help forming a new church or other nonprofit ministries, I would love to help you! As a Christian attorney who shares my clients’ Christian worldview, I understand the church world and the importance of focusing on God’s work, while also staying protected from legal threats. Contact The Law Office of Dan Beirute today so we can discuss solutions to your legal matters.