Authored by John Westercamp
From a state law perspective, churches are generally either non-profit corporations or unincorporated associations. A church is an unincorporated association by default until it incorporates with the Indiana Secretary of State. An unincorporated association is “a voluntary group of persons, without a charter, formed by mutual consent for the purpose of promoting a common enterprise or prosecuting a common objective.” 7 C.J.S. Associations § 1.
An unincorporated association is analogous to a general partnership because liability may be imputed to one member due to the actions of another member of the unincorporated association. Churches should consider incorporating for the following five reasons.
1. The corporate entity provides liability protection.
As an unincorporated association, members and leaders of the church have unlimited liability with respect to the acts or omissions of the church. For example, if a pastor signs a contract on behalf of the church or a congregation approves or ratifies a contract, those individuals are personally liable for the performance of the contract. Church leaders could also be sued individually for tortious acts of others in the church. For example, if the premises are not maintained and a visitor slips and falls, members of the church could be liable for negligence.
In contrast, as a non-profit corporation, church leaders and members are protected by a limited liability shield. If the church enters a contract, the church leaders or members are generally not liable for the breach or non-performance of the contract. Additionally, individuals are not responsible for the tortious acts of the church.
Many churches have some high net worth leaders and members, and these individuals make attractive targets of lawsuits. Because of the limited liability shield, incorporating can provide leaders and members with some protection against liability.
2. Non-profit corporations indemnify officers and directors.
In the absence of some agreement within an unincorporated association, associations are not obligated to indemnify (or reimburse) members and leaders if they are sued. In contrast, non-profit corporations may, and in some cases are required to, indemnify officers and directors who act in good faith and in the best interests of the corporation.
Indemnification may provide a significant benefit to leaders in the church. For example, if a pastor discharges an employee of the church who later sues the church and the pastor, the non-profit corporation may reimburse the pastor for any damages he is required to pay. Unincorporated associations generally do not provide for any indemnification.
3. Non-profits are governed by corporate documents and the Non-Profit Corporation Act.
Most of the Indiana case law addressing unincorporated associations was decided in the nineteenth century and leaves many unanswered questions. Therefore, in the event of a dispute with an unincorporated association, the resolution of the dispute may be significantly more costly due to the vagueness of the rules surrounding unincorporated associations.
Non-profit corporations, on the other hand, are governed by articles of incorporation, by-laws, and other corporate documents. Further, the Indiana Nonprofit Corporation Act of 1991 clarifies many rules regarding non-profit corporations. Thus, a church can benefit from increased clarity of the rules addressing corporate law.
4. Incorporating causes churches to consider liquidation procedures.
In the absence of incorporating, many churches may have no reason to consider how the church should be liquidated if it cannot sustain itself in the future. By incorporating, church leaders are presented with the opportunity to consider and memorialize how the church should be liquidated. By deciding this question in advance, the church can avoid unnecessary conflict and strife.
5. Incorporating causes churches to consider issues of legal authority.
Many churches have a book of disciple or book of order that describes the church’s polity. These rules may address doctrinal issues. However, these rules may or may not adequately address issues concerning the legal authority of church leaders. For example, the book of disciple may not define who has the legal authority to approve or sign contracts. Similarly churches may not have addressed who has the legal authority to write checks or transfer funds. Incorporating a church can clarify issues of authority.
There are many other reasons why a church may decide to incorporate. Churches should consider the five reasons addressed in this article when deciding whether to incorporate.
Authored by John Westercamp