Should Your Church Incorporate?
By: Kathy Waters, Esq.
Is your church or synagogue a corporation? You may not have given it much thought, perhaps because for more than 200 years, and until relatively recently, a clause in the Constitution of Virginia prohibited any religious institution from incorporating. The prohibition was struck down in 2002 in the seminal case of Falwell v. Lynchburg and the Commonwealth of Virginia (the “Falwell case”) when the court ruled that the Virginia constitutional clause violated the Free Exercise clause of the Constitution of the United States and also raised an issue under the doctrine of separation of church and state. Subsequently, in 2005 the Virginia General Assembly passed legislation codifying the right of a church to incorporate and the effect of such incorporation.
Before the Falwell case, if a church wanted to own, sell, convey, encumber or improve real estate, it had to petition the Circuit Court for issuance of court orders: first, to appoint trustees of the church; and second, to authorize those court-appointed trustees to take actions involving the church’s real estate. These are somewhat burdensome (and arcane) procedures, and obtaining court orders can delay the church’s transactions involving its real estate.
The process, delays and requirements involved in the trustee model (an unincorporated church) beg the following questions: Should an existing, unincorporated church incorporate, and should a new church incorporate at the outset?
If the church owns, or intends to own, real estate, incorporating is generally a good idea. Incorporating is relatively simple: file Articles of Incorporation with the Virginia State Corporation Commission (SCC) and pay the charter and filing fees. However, before incorporating, church leaders need to understand Virginia law regarding provisions required to be in the Articles (as well as in its Bylaws) and other matters affecting corporations.
It is recommended that, when considering incorporating, the church leaders meet with an attorney to discuss the pros and cons, the process and applicable law. The leadership needs to understand that its existing governing documents (its charter, rules of procedure, bylaws, etc.) most likely do not meet Virginia legal requirements (and must be re-written) and to understand the basics of corporate formalities (e.g., organizational meeting of the initial Board of Directors, the convening and conduct of subsequent Board meetings, election of Board members, appointment of officers, membership meetings [if the corporation is to have members], minutes of meetings, the keeping of complete books and records of the corporation, etc.). The church leadership must also be made aware of the required annual filings with the SCC. Conducting its affairs as a corporation, at least as to its governance and procedures, most likely will be different from how the church had previously operated.
Limitation of personal liability of directors and officers is a key reason why a business incorporates. The same applies to a church: the corporate form helps to limit the church’s leaders from personal liability if claims are made against the church. However, it is acknowledged that the trustees and other leaders of an unincorporated church generally cannot be held personally liable for the actions of, or against, the church (absent their acting without the express consent of the church’s governing body, their gross negligence or their failure to adhere to the fiduciary duty owed to the church and its members).
Some churches may view the requirements of annual filings with the SCC, following required corporate procedures and observing corporate formalities as being too burdensome and not affording sufficient benefits for incorporating to be worthwhile. Nevertheless, incorporating does bring certain advantages: ease of owning and dealing with real estate; avoiding the time and expense of obtaining court orders; the potential of enhanced limitation of personal liability of church leaders; and the ability to qualify for certain grants not available to unincorporated churches (e.g., grants from governmental faith-based social service provider programs, or from various private foundations).
If a church does incorporate, the Virginia Code allows the court-appointed trustees who hold title to the church’s real estate to convey it to the corporation without the need to get a court order. Any acceleration provision in the church’s loan documents cannot be invoked by the lender in the instance of such transfer of title. The trustees can easily transfer title to all of the church’s personal property to the corporation. And, the transfer of title to real and personal property automatically assigns to the corporation all insurance policies covering the property transferred.
On balance, it might be very worthwhile for a church to consider incorporating. The church leaders should try to meet with the leadership of another church which did incorporate in order to discuss its reasons for doing so. In addition, prior to incorporating, it is well advised for the church to confer with legal counsel to, inter alia, discuss required provisions for the Articles and Bylaws, required corporate procedures for conducting its business and the importance of following corporate formalities to preserve the benefit of limitation of personal liability.
The attorneys of Compton & Duling, L.C. have experience with church incorporation issues. Contact Compton & Duling, L.C. at (703) 583-6060.
Disclaimers: This article is limited in scope and depth. We recommend retaining an attorney licensed in your jurisdiction because each particular legal matter is unique. This article is not intended to create an attorney-client relationship with the reader. Further, this article is not intended to provide tax or financial planning advice.