Churches often begin as an informal community of individuals who gather together to pursue common religious interests. A church can successfully operate like this for many years without problems. But there can come a time when the church can benefit from incorporating as a religious nonprofit corporation.
Operating as a nonprofit association
A group of people who form an organization together without forming a special legal entity are treated as being in an unincorporated association. State law governing such organizations is quite flexible, allowing them to adopt operating rules largely as they see fit. They come into existence as soon as their members decide to organize into a group. They are allowed to own property and can sue and be sued, just like an incorporated entity.
In California an unincorporated church may operate as a nonprofit association provided that its primary purpose is not to operate a business for profit. Cal. Corp. Code §18020. Subject to a number of exceptions (largely having to do with assumption of personal responsibility), California shields members, directors, officers, and agents of a nonprofit association from liability for the organization’s ordinary debts and contractual obligations. Although it isn’t required, a California nonprofit association can file a formation document with the state to document its existence and make formal claim to its name for state registration purposes.
There are a couple things to bear in mind about nonprofit associations. First, a church’s 501(c)(3) tax-exempt status under federal law applies even if it operates as a nonprofit association. Although incorporation isn’t required, formalities must be satisfied to receive tax-exempt status from the IRS and the state. Second, even though they are not subject to complex governance rules, every nonprofit association needs to spend time developing its governance documents. Failing to do so risks leaving essential questions unanswered, opening the door for misunderstandings and worse.
What are the benefits of incorporating?
When a church incorporates in California it ordinarily does so by forming what is called a religious nonprofit corporation. Unlike an unincorporated association, a corporation must have certain features, such as a board of directors, prescribed governance documents, and other matters. Formation requires filing paperwork with the state and compliance with a range of special rules.
There are a number of reasons why a church might want to incorporate. Perhaps the most important is that personal liability protection is substantially stronger in a corporation. Although California law gives members of a nonprofit association a degree of protection, a corporation’s liability protections are substantially more robust. Liability matters most in times of crisis—for example, when a violent crime is committed on church property—but it should also concern management of any church that has employees, works with children, or owns substantial property.
Another reason to incorporate is the added credibility and simplicity it brings to relationships with third parties. Establishing an officer’s authority to bind an unincorporated association to contracts can require disclosing the group’s governing documents. On the other hand, outsiders may perceive a corporation as a more robust, trustworthy organization. Businesses like banks and contractors are used to dealing with corporations and “speak their language.”
Some churches also find that benefits and programs they wish to use are not available for unincorporated associations. This may be true for things like employment benefits, insurance, or some charitable grants.
Speak to a California church law attorney
The Church Law Center of California specializes in helping churches organize and govern themselves. If you are thinking about whether now is the right time to incorporate your church, call us today to see if we can be of help. We can be reached at (949) 892-1221 or through our contact page.