Is Your Church Incorporated?
by Richard R. Hammar
Are your church members willing to be held individually for actions of fellow members? Not if they’re like people I know! Danger. They can be held liable if your church isn’t incorporated.
Result: Their personal money and property may be taken to pay a judgment.
Why the Worry?
Of the many reasons why a church should incorporate, by far the most important is to protect members from personal liability for the actions of fellow members.
Case in point: A Texas woman owned property she allowed a church to use. When unpaid taxes resulted in a tax foreclosure sale, a church employee, allegedly telling the woman he was acting for her, bought the property in the name of the church. The woman filed a lawsuit seeking monetary damages and a return of her property.
Key point: Since the church was unincorporated, the woman claimed the individual members of the church were personally responsible for the alleged misconduct of the church. The woman filed a class action lawsuit naming all the members as defendants.
Result: A state appeals court ruled that individual members of an unincorporated church could be personally liable for the conduct of fellow members. The court noted that “an unincorporated association is a voluntary group of persons, without a charter, formed by mutual consent for the purposes of promoting a common enterprise. . . . Members of an unincorporated association are individually liable for tortuous acts of agents or employees of the association if the tort is committed within the scope of their authority.”
Important: This ruling should be a concern to any member of an unincorporated church.
Worth considering: We are living in the most litigious society on earth. There are more lawyers in the state of California than in all of the rest of the world combined (excluding the other 49 states). It is inevitable that increasingly plaintiffs will seek to sue the members of unincorporated churches in their efforts to find “deep pockets” to satisfy potential judgments.
Added problem: Gaps in many churches’ insurance policies. Example: Many churches are not insured for sexual misconduct, yet such claims can result in multimillion-dollar court judgments. In such cases, attorneys may check to see if the church is unincorporated to determine if members may be personally liable.
An Easy Remedy
The good news is that a church can easily protect members from personal liability for the conduct of other members by incorporating the church. Note: While incorporation is a simple and relatively inexpensive process, it does require the assistance of an attorney.
Important: Incorporation will not protect a member from liability for his or her own actions, but it will protect other members who did not participate in the member’s actions.
First step: Determine if you are already incorporated. Often leaders do not know if their church is incorporated, although many assume it is. Caution: This is a dangerous assumption if the church is not incorporated.
Essential task: Confirm whether the church is incorporated by contacting the office of the secretary of state in your state capital. Representatives ordinarily will tell people over the telephone whether or not the church is incorporated.
Suggestion: If you are told your church is incorporated, ask for a certificate of good standing (the name of this document varies somewhat from state to state) that confirms this corporate status. Also: Request a certified copy of your charter (articles of incorporation), to be sure a copy of the document is on file with the state.
Next: Make sure your incorporation remains valid. Even if you think your church is incorporated, it is a recommended practice for churches to confirm each year with the office of their secretary of state that they are in face a corporation in good standing. Reason: The corporate status of many churches has lapsed through failure to file annual reports.
Explanation: IN many state, church corporations must file relatively simple annual reports with the office of secretary of state. In a surprisingly large number of cases, churches do not fire these reports. In some state, the failure to file these reports will cause the church’s corporate status to lapse.
Result: Those who have assumed the corporate status protects them against personal liability may find themselves named as defendants.
Who Owns Your Church?
Churches face other legal complications if their corporate status lapses.
Example: A New Mexico court ruled recently that a charitable organization’s dissolution clause is triggered automatically when its corporate status lapses through failure to submit an annual corporate report to the secretary of state.
What this means: Some other organization could get your church! According to this ruling, if the corporate status of a church lapses, the organizations assets automatically vest in the organization specified in its dissolution clause. It is as if the church has gone out of business.
Explanation: A dissolution clause (ordinarily set forth in a corporation’s charter or bylaws) specifies how a corporation’s assets are to be distributed upon its dissolution. By law, the assets of a church or other charitable organization must be distributed to another religious or charitable organization upon its dissolution.
Trap: Many church leaders do not know what organization is listed in their dissolution clause. They should, however, because that organization may be the legal owner of the church’s assets!
What we can learn: This case illustrates again the importance of complying with annual corporation-reporting requirements prescribed by state law.
Is Incorporation Proper?
Some church leaders are opposed to incorporation for theological reasons. If so, they need to explain their position to the members.
Reason: Members may not share this theological position once they are apprised of the potential consequences, and members should not be exposed to personal liability without their knowledge and consent.
Note: In court, theological opposition to incorporation will not be a usable defense to the personal liability of church members.
The above was published in Your Church Magazine, May/June, 1993. pp. 12-14
Christian Information Network