Many churches start small, meeting in community centers or their members’ homes, focusing on religious study and dialogue. For some groups there comes a point where they begin to identify as a church, but their goals and activities remain modest. But for others, as the church’s congregation grows so do its ambitions. One of the challenges for church leaders who are growing a new organization is to take into account legal risks before they threaten to impede the new church’s growth.
Even a very small church can face risks. Any time a group gathers for a lawful purpose the law treats it as an unincorporated association, a kind of legal entity. As a nonprofit association, a church can be sued as an organization even if no other formal steps have been taken to organize it.
A lawsuit against an unincorporated association could happen if, for example, someone attending a church meeting is injured and sues the church to recover for medical bills. If the church is meeting in a member’s home, the member’s homeowner’s insurer may bring the church into a lawsuit even if the injured person doesn’t initially want that. Although this sort of risk is faced relatively infrequently, it can have serious consequences for the church and its leadership in some situations.
One way a church can get ahead of risks like these is to take further steps to get organized. A nonprofit association can improve the evidence of its existence by adopting governing principles that will guide its decision-making process, identify people who have authority to bind the church to contracts, and establish baseline rules for finances, among other things. Unincorporated associations may also register with the state. For some churches, incorporating may help manage risks further. Although California law provides some liability protections for members of an unincorporated association, they generally are not as robust as those provided to directors and shareholders of corporations.
Tax is another important area that new churches may overlook until it is too late. To be treated as a tax-exempt organization for state and federal purposes (that is, to be relieved of paying income taxes), a church must comply with formal requirements. Until those requirements are satisfied, the church’s income from donations and fundraisers may be subject to taxation. The good news is that the federal exemption is available to churches without the need for first obtaining IRS approval. The important thing is that the church meets the requirements for the automatic exemption. A sloppy start to finances and tax can put the church organization on an unsound foundation, exposing it and sometimes its leaders to penalties.
The Church Law Center of California provides legal advice to new and established churches on matters affecting their risks and governance. If your church is still new it is a good time to take an accounting of the kinds of legal matters that you may face as your congregation grows. Call us today at (949) 689-0437 or through our contact page.