Frequently Asked Questions About Church Incorporation

One of the many services we provide to churches and ministries is to incorporate them as nonprofit religious corporations. The following are typical questions we are asked about church incorporation: [References herein to churches apply equally to church schools, ministries, and religious associations.]

1) Why would church incorporation even be needed for our church? Church incorporation is now the recognized trend among authorities who study church problems and church management. According to the major church insurance companies lawsuits against churches and pastors have increased dramatically in the last 20 years with larger settlements and jury verdicts against churches and pastors.

2) What does incorporating mean? A church that is not incorporated is deemed by the law to be just a loose association of individual members. It does not have a separate and distinct legal status all its own. When a church incorporates it is establishing itself as a separate legal entity, a corporation, which is recognized by the law as distinct and separate from its individual members. This protects those members from claims or lawsuits against the church.

3) Why are so many churches incorporating? Protection of members and pastors from lawsuits is the main reason. There are more lawsuits being filed now against churches and pastors than at any time in history. If an unincorporated church is sued, every member of that church is personally liable for that claim and any judgment against the church. This is true even if they had nothing to do with the incident that caused the lawsuit. The suing lawyer typically will look for members with financial means from whom he can collect a judgment. He need not restrict himself to church assets.

4) What if our church is already incorporated? Hopefully your church will already be incorporated. If so, you probably will have the protection incorporation provides. However, there are innumerable churches which believe they are incorporated but which are not. We have come in contact with many churches which thought they were incorporated only to learn - usually as a result of research our office did - that their charter had lapsed or been revoked. This loss of corporate status and protection most often happens because the incorporation process was not done well to begin with, or someone within the church has not been diligent about sending in annual reports or notifying the church when an administrative revocation is about to happen. The church therefore is unprotected without knowing it. This is similar to believing an insurance policy is in effect, when it is not – a potentially serious situation.

5) Why are churches and pastors being sued? Churches and pastors can be sued for many reasons: injuries on church premises or by a vehicle driven on a church function, or for slander, wrongful dismissal, pastoral counseling, contract disputes, bad debts, child abuse by others, or many other causes.

6) Why would a lawsuit against my church be a threat to our members? When a claim is made or a lawsuit filed against an unincorporated church, every member of that church is potentially liable individually to pay the claim - even if they had nothing to do with the incident that caused the lawsuit in the first place. Church members often assume that only church funds or property can be taken to pay a legal judgment, but that is not the case if the church is unincorporated. Individual members can lose their personal assets or property.

7) How does incorporation help? Incorporation “shields” church members’ bank accounts and assets and will permit only church assets to be used to pay a court judgment.

8) But won't our insurance take care of such things? Churches sometimes assume their insurance coverage is sufficient to protect them in the event they are sued or a claim is made. However, insurance coverage may be inadequate. If the policy amount is not large enough to pay the claim fully then the church members are responsible. Also, an insurance policy may not cover the particular incident which caused a lawsuit. But even if the church is heavily insured, incorporating protects all members from individual liability. Insurance will not.

9) Are there other reasons to incorporate? Yes, when a church is unincorporated and borrows money to build or enters into any type of contract, every individual member of the church is liable for that contract or loan. By incorporating, individual members of the church can avoid this personal liability whenever a loan or contract is made by the church.

10) Is it true that banks, lending institutions, and other major businesses prefer to do business with incorporated churches? Typically, yes. Incorporation suggests financial stability and good management.

11) Are there other reasons for incorporation? Yes, pastors and church leaders report that incorporation of their church had the effect of upgrading the conduct of their church business and financial affairs, including record keeping, bookkeeping, the handling of funds, and the conduct of church meetings.

12) Should any church incorporate? Not necessarily. Small churches which do not own a vehicle, have no youth programs or playgrounds and do not engage in other activities which increase their "exposure" to possible liability will not have as great a need. However, any church can benefit from incorporating. Furthermore, there is no "down side" to becoming incorporated other than the expense of setting up the corporation – which is a one time cost.

13) Are we protected if our church is already incorporated? Hopefully, but not necessarily. Many churches simply adopt a charter, have it filed and then adopt bylaws, but do little else to establish their corporate status. In fact, there are many more steps which need to be completed - usually about 12 more in all - to ensure the incorporation was properly and fully done. Failure to do all of these, or failure to maintain corporate practices after the incorporation is completed, can result in the corporation lapsing or the protection of incorporation being lost. Indeed, in one recent year alone we reincorporated nearly a dozen churches which thought they were still incorporated until they learned their corporate charters had lapsed or been revoked.

14) Can't we just get the incorporation done quickly by filing a charter? If the incorporation is not done fully and properly your church may suffer and perhaps even lose the protection of incorporation. There are approximately 13-15 steps (depending on the church, ministry, school, etc.) which should be done in order to be certain the incorporation is fully done. Many incorporations only cover perhaps 3 or 4 steps, such as the filing of the charter and adopting bylaws.

15) Is there some risk to keeping this short and simple? Yes. If a church files a charter but does not follow through with other very important remaining steps in the incorporation process, this can ultimately mean they may lose the protection of a corporation even though they are technically filed as such. We strive to make certain this never happens to our church, school or ministry clients.

16) Is incorporation expensive? No, especially when you consider that it is a one time expense. Unlike insurance which must be paid for continually in order to provide protection, incorporation is paid for just one time. The protection afforded by incorporation is effective as long as the church chooses to maintain it. We provide 3 plans for incorporation: Basic, Intermediate and Advanced (described below) and will, upon request, send a fee schedule.

17) Doesn’t incorporating your church mean you are permitting the government to have some say over church affairs? No. Incorporation does not permit the government to dictate to your church. It is simply a form of legal protection which is provided to churches. Furthermore, if a church ever felt that its incorporated status threatened its independence from the government, it is a simple matter to dissolve the corporation quickly.

18) Will incorporation affect our tax status? No. Incorporation does not affect a church’s tax exempt status.

19) How long does it take to incorporate? We make every effort to respond to our clients promptly. Typically, we prepare a charter and send it back to the church within 24 hours. The remainder of the process usually takes about 3 weeks depending on how quickly we are provided necessary information.

20) Do you provide model bylaws as part of the incorporation process? Yes. We have drafted a set of model bylaws which - unlike any bylaws we have seen - include special provisions that deal with church discipline, preventing and resolving conflict within the church, avoiding lawsuits, and other issues frequently confronted but not typically addressed in bylaws.

21) Will our church's denominational preferences be reflected in our bylaws? Yes. In fact, we have drafted - with the help of denominational leaders - custom bylaws for some specific denominations. These bylaws blend denominational preferences with all legal requirements for an incorporated church. Some of the denominations include: Assemblies of God, Baptist, Church of Christ, Cumberland Presbyterian, Methodist and Pentecostal.

22) Can you incorporate our church regardless of its location? Yes, we can incorporate your church regardless of where it is located in most cases USUALLY INCLUDING IN MOST STATES.

23) How is your incorporation work different? Some churches retain a lawyer, who prepares and files a corporate charter and some form bylaws, yet little may be done beyond this to ensure that the incorporation is sound and complete. Sometimes the proposed charter may not be well adapted for the church's purposes - perhaps a form charter which came from a lawyer's form book. We, on the other hand, have custom drafted our charters and specifically drafted Model Bylaws for churches, ministries, Christian schools and associations of specific denominations. We adhere to the denominational preferences of each denomination we work with.

24) How do we begin the process of incorporating our church? By completing our Church Incorporation Application which can be found at our web site (www.ivyscarborough.com) or requested through our e-mail (ivy@ivyscarborough.com), or by phone at 1-844-IVYSLAW (toll-free).

25) Are you available to talk to our church or church leadership and answer questions about church incorporation? Yes. Cost is based upon the amount of time involved. However, I also provide consultations by phone - through the use of a speaker phone at your church or office - without charge to answer questions for your church or your church leadership.

26) How would you go about incorporating our church, ministry, school or association? We provide 3 plans for incorporation. Two of these, the Intermediate, and the Advanced Plans, ensure that a church or ministry's incorporation is done properly and completely with nothing left undone. The plans are described below.

A) BASIC PLAN - provides for:

1. Initial consultation.

2. Preparation of corporate charter.

3. Filing of charter with Secretary of State.

4. Filing of charter with Register of Deeds.

5. Preparing Model Bylaws in hard copy and on computer diskette so the church can easily tailor them on computer to suit the church's needs.

6. Listing of further steps which must be taken in order to be a properly incorporated church.

Cost — $985 Plus expenses (filing fees, etc.) $207 [We do not recommend this plan unless you have someone on staff with the experience and diligence to promptly complete the additional steps in the incorporation process as done in the Intermediate Plan below.]

B) INTERMEDIATE PLAN – Our most popular plan. More than 90% of our church clients select it. It provides everything in the Basic Plan described above PLUS completing all other steps in the incorporation process as follows:

1. Preparation of a new deed to convey all church property from the old church name into the name of the newly incorporated church.

2. Filing of change in status with IRS regarding the church’s FEIN (Federal Employer Identification Number) and newly incorporated status;

3. Filing the appropriate notification with the Department of Revenue;

4. Notification of church insurance carriers of change in corporate status;

5. Notification of banks or lending institutions of change in corporate status;

6. Assistance in retitling any church vehicles in name of the new corporation;

7. Obtaining copy of IRS tax exempt letter in new corporate name (where applicable);

8. Providing Handbook with information on proper corporate procedure as well as forms for future meetings – all done once the incorporation is finished;

9. Documenting for the church's records the completion of all of these steps.

Cost — $1785 Plus expenses (filing fees, etc.) $207

C) ADVANCED PLAN – Our second most sought plan; includes everything in the Intermediate Plans above plus we come to your church and present a seminar on risk prevention and problem avoidance entitled "How to Protect Your Church & Prevent Lawsuits and Legal Problems." It addresses every major area of potential legal troubles for a church or pastor and describes how to prevent them and how to best address them when they occur. Handbooks provide a ready future reference.

Cost — [Determined by what is requested of us and the time necessary to complete the services. Projected costs can be estimated through a brief phone consultation. There is no charge for this consultation.]

If there are further questions, Mr. Scarborough can be reached at 1-844-IVYSLAW (toll-free); by fax at 731-784-1636; or by e-mail at ivy@ivyscarborough.com.

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