02/08/2021 – Times Are Changing in America Resource Center | Statements of Faith and Codes of Conduct LEARN MORE

Every day, calls come into the National Center for Life and Liberty because the unthinkable has occurred. Someone got into a serious accident with a church-owned vehicle, or a child was injured on church grounds and was rushed to the hospital. After ensuring immediate care has been provided, the question of liability arises. It’s vital your church ensures proper insurance coverage is in place ahead of time, because when the unthinkable happens, it will be too late to do so.

The first area of liability review involves incorporation of your church. Incorporation creates an important shield of liability for your membership and church leadership. Churches automatically maintain 501(c)(3) status with the IRS, but to be tax exempt, a church must be formally organized. Although formal organization does not necessarily require incorporation, every church, regardless of corporate status, must adopt a written document as its standard of organization.

This written document may be called by different names depending on whether or not the church is planning to incorporate. For an incorporated church, it would be called “articles of incorporation,” for an unincorporated church, “articles of association.” A church may also be organized as a trust or an unincorporated association.

If the church has no formal written document giving evidence of its creation, the church is not exempt from federal taxation. The NCLL recommends that churches choose to incorporate because incorporation provides many benefits that are not available to unincorporated churches. The incorporated church may own and transfer property in the name of the church, enter into contracts, and take out loans in the name of the church without requiring personal guarantees of the church’s leadership.

One of the primary benefits of incorporation is the liability shield that incorporation provides for church members and leaders in the event of a lawsuit against the church. In most states, churches that have not formally incorporated do not receive this liability protection for their members and leaders. There have been instances where an accident occurs and because the church is not incorporated, every single church member has been sued in lieu of suing a corporate entity. Incorporation ensures an important liability barrier between the corporate entity and your church membership.

To be exempt from federal income taxation, the purposes of the church must be limited and stated as such in its formal organizational document. Stating these purposes only in the bylaws rather than in the organizational document will not satisfy the requirements of § 501(c)(3).

A business may organize with the general purpose of “engaging in any legal activity,” but a tax-exempt organization must declare that its purposes are limited to those stated in Internal Revenue Code § 501(c)(3). A church’s organizational document should state that its purposes are “religious, charitable, and educational.” A church may also explain with more particularity the activities in which it proposes to engage, but at some point, in the purpose clause of that document, the legal wording “religious, charitable, and educational” must be included. We recommend not restating those terms using other words. If you want to ensure your articles of incorporation are compliant, you can send them to info@ncll.org for a review.

As a tax-exempt organization, care must be taken to ensure all activities of the organization fall within IRS code 501(c)(3). Benevolence fund gifts, compensation, loans, sales and lease agreements, and private business interests are all areas that should be considered carefully before proceeding. Documentation of any transaction, such as providing a benevolence gift or compensation, should be filed and maintained for a period of at least seven years. If you have any questions about a transaction, gift, or agreement, contact us today to have it reviewed and ensure your ministry stays protected.

At the NCLL, we want your ministry to experience "maximum ministry with minimum liability." Our office can review your articles of incorporation or help you start your incorporation process today. Please don't wait until it’s too late to ensure proper protection is in place. You can send your articles of incorporation to info@ncll.org, and our legal team will review them to help ensure you've covered all the necessary areas of concern for your ministry.