A solid Foundation

A Solid Foundation

Presented By

Stalcup, Brewer, Wallace & Lang, PLLC

This paper is presented by Stalcup, Brewer, Wallace & Lang, PLLC as a service to churches. At Stalcup, Brewer, Wallace & Lang, PLLC., we are church lawyers. Together, our attorneys have over 100 years of experience working with high-profile churches and ministries. Our lawyers leverage their experience, relationships and knowledge to benefit our clients. Our work includes acting as general counsel and advising on matters such as Entity Formation and Structuring, Federal and State Tax Exemption, Mergers and Acquisitions, Significant Business Transactions, Corporate Governance, Liability Prevention, Intellectual Property Rights, Executive Compensation and Financing Transactions.

While we are lawyers, we also bring more than our legal expertise and experience to our clients. Two of our partners, Dennis Brewer and Curtis Wallace also have extensive experience as executives with large ministry organizations. As a result, our clients benefit not only from our experience on the business side of ministry, but also from our extensive relationships with leaders and executives across the church and media landscape.

Disclaimer: This Paper is presented for informational and educational purposes only. Nothing in this paper is intended to be or should be construed as legal advice. Every situation is different and fact specific. Please consult with a qualified attorney to receive advice specific to your situation.

A Solid Foundation

No matter where you are on your ministry journey – whether you are just starting a new church, taking over the leadership of an existing organization, or have been in ministry for years – you should be operating from the premise that your work is God ordained and will be blessed. That means you need to build your church or ministry so it can withstand the weight and scrutiny that comes with success. This paper is designed to help you do just that.

From a legal perspective, the very first step is to form a properly structured non-profit corporation through which you will operate your church or ministry. You may be asking, “what is a corporation”? A corporation is simply an entity that the law has created so that a group of people can operate a common enterprise together for a common objective. The law allows people to form an entity, called a corporation, so that the enterprise – be it a church, oil company or car wash – can have its own existence separate and apart from the people who operate the enterprise.

This separate existence provides a corporation with two distinct advantages. First, a corporation will provide you with personal legal protection against liability. Because the corporation has a separate legal existence apart from the people who run it, as a general matter, the corporation, not the people who operate the corporation, is accountable for the actions of the corporation. In other words, the corporation acts as a legal shield of protection for the individuals involved in running the church. Similar rules apply to the debts and obligations of the church. If the corporation incurred the debts, the corporation alone is liable for those debts (unless some individual personally guaranteed the debt). Clearly, the separate existence and legal shield afforded by forming a corporation are extremely beneficial.

Moreover, forming a non-profit corporation will make it much easier for your church to enjoy the advantages of being tax-exempt. While it is possible for a church to operate on a tax-exempt basis without forming a corporation (a church that operates without being incorporated is called an “unincorporated association”), it is often difficult. Businesses and governmental agencies particularly are accustomed to dealing with corporate entities. Forming a non-profit corporation makes it very clear what your organization is and what it is not. As a result, filing for and obtaining various exemptions for sales taxes, property taxes and the like, will be greatly eased.

In the above paragraph, we used the term “non-profit corporation”. Before we move on to how to structure and form a non-profit corporation, let’s take a quick moment to distinguish between the for-profit and the non-profit corporation. Most of us are familiar with the corporation that is a for-profit entity. Millions of businesses, large and small, are organized as for-profit corporations. These organizations are owned by individuals (or other entities) called shareholders. The shareholders reap the financial rewards of “owning” the corporation.

Non-profit corporations, on the other hand, are operated for the public good and are not “owned” by anyone. When a non-profit corporation earns a “profit” at the end of the year (yes, a non-profit can and should earn a “profit” if it is going to stay in existence and grow), the money does not go to shareholders (there are no shareholders). Instead, the funds generated by the non-profit must be used for the exempt purposes for which the corporation was formed (such as charitable, educational, religious – more about this later).

In essence, our local, state and federal governments have made a deal. The deal is, that in exchange for the tax-exempt status that is granted to most non-profits (it is possible to be a non-profit, but taxable corporation – more about this later), non-profits cannot be owned by any individual. Instead, the earnings of the organization (including the savings that result from not having to pay taxes) must be used for an allowed purpose that the government has determined benefits society in general (such as educational, charitable, and religious purposes).

The implication of this concept is immense. Because no one, not even the founder or long-time members of a church or ministry, owns any part of the non-profit corporation, no one, neither the staff nor the members, should conduct themselves as if they own it. This means that the corporation’s assets cannot be used as if they belong to an individual or a group of donors. Furthermore, a non-profit corporation cannot freely distribute its assets to people. It can only pay fair value for goods and services received. This means its employees can earn a reasonable salary and benefits in exchange for their efforts, but that is it (again, more about this later).

Why then, would you form a non-profit corporation instead of a for-profit corporation? The answer is simple: taxes and donations. Most non-profits, including all churches, can obtain exemption from most taxes such as property, sales and income taxes. Moreover, non-profits can receive tax-deductible donations from donors.

In other words, the government (local, state and federal) has chosen to give up billions in tax revenue, but the trade-off is that non-profit corporations must be operated for the benefit of the public, not individuals. So, when we question the regulations imposed on churches and other non-profits, we must remember the deal. We can get rid of the regulation anytime we want to, as long as we are ready to pay the tax and give up the tax-deductible treatment of the donations.

The bottom-line is that, if you have not already done so, you should strongly consider establishing a non-profit corporation through which you will operate your church or ministry.

Establishing a Non-Profit Corporation

Today, the actual process of forming a non-profit corporation is a relatively quick and simple process. Once a few key decisions have been made, the paperwork can be completed in a relatively short time. The steps are:

2. Incorporation documents, (called Articles of Incorporation in some states and called a Certificate of Incorporation or Certificate of Formation in other states – hereinafter we will call the Incorporation documents for simplicity’s sake, “the Articles”) are prepared and filed with the designated state official, typically the Secretary of State in your state (or the state where you want to incorporate) and the required filing fee is paid. Once the Secretary of State has accepted the Articles for filing, the corporation begins to exist as a separate entity.
3. Bylaws (sometimes referred to as a “Constitution”) are prepared. This document contains the rules for governing the organization. Unlike the Articles, the Bylaws are not filed with the State.
4. An initial meeting of the Board of Directors of the newly formed corporation must be held to (i) approve its formation, (ii) adopt Bylaws, (iii) and take care of a few other housekeeping matters. This meeting can be held either in person or by written consent signed by all of the Board members.
5. The corporation needs to apply for and receive a Tax ID Number (also called an EIN or Employer Identification Number). This is effectively the social security number for the corporation. The Tax ID Number can be obtained online at www.irs.gov in a few minutes.

Armed with a copy of the corporation’s Articles, Bylaws and Tax ID Number, you can go to your bank and open a bank account in the name of the corporation.

The Articles are the formal document that is filed with the Secretary of State or State Corporation Commission in your state. This is a relatively short document (3-5 pages) that serves to establish the corporation as an entity that is recognized under state law. This document includes basic information on the corporation, including:

• Corporation’s Name
• Purpose
• Initial Board Members
• Name and Address of the Corporation’s Registered Agent (discussed below)

The Bylaws, on the other hand, are much more detailed and contain the rules for operating and governing the corporation. As the corporate rulebook, the Bylaws establish who has what power and authority and what steps need to be followed in order to properly and legally implement an official course of action. Therefore, the Bylaws become all important when there is controversy or a difference of opinion among a corporation’s leadership about whether or not to take a specific course of action.

As a pastor or board member, you need to understand your Bylaws and know the rules that apply in the event of a dispute. For example, if the Senior Pastor wants to take a certain action and the Board disagrees, the Bylaws will inevitably dictate who wins the battle and the war. The Bylaws accomplish this by setting out who has the power to take a specific action and who has the power to elect or remove whom.

You also need to ensure that your Bylaws reflect how your church is actually being governed. If you are not following your own rules, you are asking for trouble when a dispute does arise. As the saying goes, Bylaws don’t matter until they matter.

As you can see, the specific language of these organizational documents (the Articles and Bylaws) is very important. There is no “one size fits all” non-profit corporation and you do not want a set of boilerplate documents. To put it in “suit” terms, this is a time when it pays to spend the money and get “bespoke” documents and not buy off the rack. Trust us, when you have a problem, you will be happy that you made the investment and customized documents that reflect your intent and desires. In order to make sure you have the right documents, you will first need to consider and make a Do not type any text above this comment.

number of important decisions.

The Important Decisions

Whether you hire a lawyer experienced in structuring non-profit organizations (especially religious organizations) or decide to walk through the process on your own, there are a few issues that you need to consider and decisions that need to be made before you and/or your lawyer are ready to prepare and file the Articles.

The Right Name

The first step is the most fun, choosing a name for your new corporation. We suggest choosing several names (at least 3 or 4) and ranking them in order from favorite to least favorite. Then, you or your lawyer need to conduct several searches:

3. A search with the Secretary of State (corporation commission) in your State to see if the name is available in your state. The basic test is whether the name that you want to use is “confusingly similar” with the name already being used by another corporation in your state.
4. A domain name search to see if you can obtain an easy to remember domain that works with your church name. This is where a lot of churches make mistakes. They get set on a name and then end with some difficult to remember domain name. Your website is your front door – it needs to be easy to find.
5. You should also conduct a national trademark search on the name. The purpose of this is twofold. First, you want to be sure that you are not going to be infringing on someone else’s trademark. Second, you want to be sure that you can obtain trademark registration for the name if you choose to at some point.

Where to Incorporate

While the decision of where to incorporate a for-profit business can often be a complex process (primarily due to tax and corporate securities law reasons), for churches and most ministries, we simply suggest that you incorporate your church or ministry in the State in which you are based. Since you don’t have shareholders and the primary reason to be a non-profit corporation is to become tax-exempt, in most cases there is simply not a good reason to go to the extra trouble and expense of an out-of-state incorporation.

The Purpose of the Corporation

In order to be eligible to be considered “tax-exempt”, the Articles need to specify the tax-exempt “purpose” of the corporation for which the corporation was formed. Under the Internal Revenue Code, tax-exempt corporations may be formed for religious, educational, scientific, or charitable purposes. While these are very broad terms, “religious”, “charitable”, “educational”, and “scientific”, each have specific meanings under the tax code. If you are forming a corporation that will act as a church or ministry, we suggest that you include religious, charitable and educational as the purposes for the formation of the corporation. Using those three designations will cover practically any activity that a church or ministry may engage in.

For example, “religious” covers all of your basic ministry related activities that are designed to spread the Gospel. “Educational” will cover a school, and “charitable” will cover any benevolent activities undertaken by the church, such as food programs.

For tax-exemption purposes, the IRS requires the Articles to include a statement to the effect that the corporation “shall be operated exclusively for (insert the purposes such as religious, educational and charitable) purposes as defined by the Internal Revenue Code.”

Second, the purpose statements set forth what the corporation was formed to do. We suggest a very broad statement such as “to spread the gospel of Jesus Christ by any means possible.” Such a broad statement covers any activity in which a church may engage. The point is to avoid the necessity of having to later re-write your Articles. There is no real need to try to be specific here and list all of the things that you might decide to do in the future. Whether you include a simple statement or prepare something more elaborate, just remember that the document will be a public record. Anyone who so desires can go online (in most states) or send a request to the Secretary of State and obtain a copy of your Articles.

Whether to Have Members

Non-profit corporations come in two basic types, those with members and those without members. As a result, the Articles will need to include a statement as to whether or not the Corporation will have members. Then, if the corporation has members, the rights of those members will be set out at some point (usually in the corporation’s Bylaws).

Before moving ahead, we need to make an important distinction. While most churches have “members” who join and support the church, you can decide as to whether these “members” of the congregation are also “members” for purposes of state corporate law. Under state corporate law, if you choose to have “members”, those individuals may have certain rights (similar to shareholders) in the management of the corporation. For example, members are, for the purpose of state corporate law, generally but not always, if specified otherwise in your Bylaws, entitled to vote on certain issues like the election of the Board, purchase of property, the sale of the corporation’s assets or similar matters.

While most states allow non-profit corporations a great deal of latitude to specify (usually in the corporation’s Bylaws) exactly what authority the members possess, many states do have statutes that specify certain basic rights for “corporate members”. The important point is that it is possible to have members for congregational purposes without granting those members the authority and rights granted to “corporate members” of non-profit corporations set out under state corporate law. It is also important to point out that your church Bylaws can provide that all voting, for example, takes place at the Board level, regardless of whether you have “congregational members” or statutory “corporate members”.

That being said, most church organizations will have members, and the Bylaws of the church generally provide that the members possess only those rights designated in the Bylaws. The extent of those rights will depend on the type of organizational structure that the particular church chooses.

For a pure ministry (a religious organization that does not operate a church), there is typically no need to have members and a simple statement to that effect is included in the Articles.

Before proceeding, a quick word on the organizational structure of corporations may be beneficial. With a for-profit corporation, whether it is General Motors or Al’s Burger Barn, there are three layers of power. Ultimate power always resides with the shareholders of the corporation. The shareholders own the company and ultimately call the shots. In turn, the shareholders elect the Board of Directors of the Corporation. The Board is the policy and direction setting body of the corporation. Because it is a smaller group, the board meets on a regular basis to oversee the operations of the business. In turn, the Board is charged with electing the officers of the corporation. The officers are the actual people charged with running the day-to-day operations of the business. The officers include the President, Vice Presidents (if any), Secretary, and Treasurer. These people may or may not be board members or shareholders.

With Al’s Burger Barn, Al may be the sole shareholder, the Chairman of the Board and the President. Larger companies such as GM delegate power to the board and officers. In a company such as GM that has tens of thousands of shareholders, the board runs the company.

With a non-profit corporation, the set-up is a little different. There are no owners. A non-profit and its assets do not belong to any individuals. Therefore, there is no preset ultimate authority equivalent to shareholders. However, a non-profit corporation still must rely upon people to run it. Like a for-profit company, a non-profit corporation will have a Board of Directors (with functions similar to its counterpart in a for-profit company). A church, unlike a for-profit corporation, does not have owners and, therefore, has no shareholders. A church, however, typically (but not always) has members. Those members, while they have no ownership stake, may or may not have a say in how the church is run. It is the organizational documents of the church (the Articles and Bylaws) that set forth exactly how power is divided among the members, the board and the officers.

The Right Governance Structure

In most states, the law grants broad authority for individual non-profit corporations to draft Bylaws that match their situation and needs. Therefore, Bylaws can be custom tailored to any given situation. For the most part, however, the organizational structure of churches falls into three broad categories – with infinite variations possible. We have and do work with churches falling within all three broad categories and certainly recognize and want to acknowledge that one shoe does not fit all.

The first broad category is the traditional congregation driven church. Under this structure, the church congregation is the highest decision-making body in the church. The congregation (or a subset of the congregation, such as deacons) is empowered to vote to make most major decisions and can hire and remove employees of the church up to and including removal of the Senior Pastor.

The next category is what we would call the hybrid structure. With a hybrid church, the members retain ultimate power on some specific issues. For example, voting to (i) elect the board of directors of the church who govern the day-to-day operations, (ii) remove and/or hire a pastor, (iii) take on indebtedness to purchase property, or (iv) amend the Bylaws. You can see that in such a structure, the board and staff generally have the authority to run day-to-day operations, but the members, the laity, retain the ultimate controls, including over the spiritual issues and the Senior Pastor, his staff, and the board of directors.

The third category is the board driven church. Under this structure, a board of directors has full authority to direct all activities of the church. While the church may have members, those members are not granted authority to govern the organization. The members don’t vote in the sense of calling for an actual vote by ballot at a business meeting.

The Board driven church, with the Senior Pastor serving on the Board as Chairman and as a permanent member of the Board (so long as he serves as Senior Pastor) along with the other Board members who are elected or appointed in accordance with the Bylaws and Articles, fits best when utilizing what we consider the ideal or model church structure. The model church structure, as we refer to it, is first and foremost God formed (it is biblically based; God is the architect of the Church which of course is not a business, nor a social club that does good things …it’s not a secular endeavor, it is a spiritual endeavor). It is Senior Pastor led, meaning the person called by God into ministry whose calling is to lead the church, is in fact, given the responsibility to lead it…the buck stops with the Senior Pastor called by God to lead His church.

Our model church structure is Staff directed. That is, the Senior Pastor has the ultimate responsibility, whether delegated or not, for hiring, firing, promoting, and cutting back staff as well as setting compensation for them and ultimately for leading and keeping them focused on the vision of the Church.

Our model church structure is set up to be Board accountable, with a Board comprised of the right “THEY”, who are Tough, Honest, Encouraging, and Yielded to God, and ideally, they have each been called into the ministry and are tremendous church leaders who come onto the Board with their integrity and reputation intact and very much on the line. They understand the responsibilities and liabilities of serving on the Board which places upon them extremely consequential fiduciary duties, duties that leave no room for excuses (non-recognized as they are under the law) that we see from time to time such as, “I was just following the lead of my Pastor” where the board members, or a majority thereof, are Parishioners.

The Board size, terms, term limits (if any), selection of board member nominees, appointment or election of directors (or whatever you choose to call your Board members who, regardless of the title given such as “Trustee” or “Leadership Team Member, will be treated as “directors” under the law) is set by your Articles and/or your Bylaws. Among other things, your Bylaws and Board can and should provide for and address independent audits or financial reviews, compensation studies and the appointment of various committees, including a compensation committee which determines compensation limits for the Senior Pastor, who of course does not set his own salary or serve on the Compensation Committee, and for others who are in a position of control and should not be setting their own salary or looking to the Senior Pastor to do so independently. The Board is given the ultimate responsibility for removing or replacing the Senior Pastor when the circumstances call for either.

Last but certainly not least, our model church structure is membership activated. The members are actively recruited to serve; they have the vision of the church in the forefront and the core group is fully engaged in serving, sewing, and sharing. They’re “plugged” in, and yes, they “vote”…with their feet and their pocketbook.

Each of these 3 broad categories can, of course, be adjusted and mixed and matched in various ways. In other words, there truly are endless possibilities. Make sure that you spend time with your lawyer discussing the options and what will ultimately work best for your church.

One important note here. All Bylaws and/or Incorporation Documents include an ability to be amended (your existing Bylaws and/or Articles will specify what steps will need to be taken and who has the authority to approve the amendment). This means that you are not stuck with your current Bylaws. If they don’t work for you, the Bylaws can and absolutely should be amended. This is a step we have helped many churches successfully walk through.

The Registered Agent

The Articles will need to list the name and street address (post office boxes are not allowed) of the person or entity (the registered agent can be another corporation or LLC) who will serve as the registered agent of the corporation. This person will serve two primary functions. First, this individual will be the addressee of any official mail from the state. Therefore, the name and address must be good because the state will assume that any mailed documents were in fact received. Second, this person will most likely be the person who is served with any lawsuit that is filed against the church. Therefore, use a trustworthy individual and an address that is not likely to change often (the address of the church is usually better than the address of an individual). When the person or address changes, you simply need to file a change form with the Secretary of State and pay a small fee.

This simple issue creates more problems for churches than almost any other corporate matter. Most states will periodically send out “public information” forms to all corporations. The forms are mailed to the registered agent at the registered address and are required to be completed and returned within a specified time period. If the form is not returned, the corporation will be forfeited. This means that the corporation will cease to exist as a legal entity. This happens all the time. Worse, it is always discovered at a critical time – usually when the lawsuit has arrived, and the pastor is being sued personally because no corporation exists or just before you are about to close on a building loan.

The point is a simple one. Someone needs to make sure this information stays up to date.

Board of Directors

Regardless of the organizational structure of your church which we discussed above (Congregation Driven, Hybrid, or Board Driven), all non-profit corporations are required to have a board of directors. In most states, you are required to name a minimum of three (3) board members, and you can have as many directors as you like. However, to avoid the potential for stalemates, you should avoid having an even number of people on the board unless you make other provision by, for example, providing the Senior Pastor, as COB, with a tiebreaking vote. In addition, large boards become cumbersome (it can be difficult to set up meetings) and hard to manage (increasing the board size increases the potential for having board members with different personal agendas etc.). We suggest creating a board of three or five members at the outset.

As touched upon above, your Board members are each subject to personal liability for their acts and omissions as directors. You can and should provide Insurance coverage and indemnification provisions in your Bylaws to cover acts and omissions of negligence of your board members that occur in the course of their service as directors.

However, there are scenarios when a director should not be indemnified and will not be covered by an insurance policy. This occurs when, for example, a director has violated his or her duty of loyalty and good faith to the corporation. A director has a duty to act in good faith in a manner that the director reasonably believes to be in the best interest of the corporation. This basically means that the director has a duty to try and to do what he or she believes is best for the corporation. This does not mean that the director must make the right decisions all the time (no one can). It only means that the director must try to make the right decisions.

The most common example of a director violating this duty of loyalty and good faith is when a director engages in undisclosed self-dealing. Generally, there is no prohibition against a member of your board of directors engaging in a business transaction with your church. However, two simple rules need to be met. First, the board member’s interest in the transaction should be disclosed to the full board and approved by a majority of the other board members (the involved board member should not vote on the item). Secondly, the transaction should be fair to the corporation.

Here is an example. Your church is looking for land to build a new sanctuary. Board member Joe suggests that the board look at a tract of land that he has seen. Board member Joe does not disclose that he owns the company that owns the land. He then tells the board the land is a great deal and the church should sign the purchase contract. If it turns out that the land is worth half of what director Joe said, and he never disclosed his interest in the deal, because director Joe put his personal interest above the best interest of the church, he violated his duty of loyalty to the church and he may face liability as a result.

Another example of violating your duty of good faith is by following a course of action that you know is wrong and continuing despite your knowledge that the act is wrong or illegal. It is clearly a violation of this duty owed to the church not to engage in conduct you know is wrong.

One final note: board members need to make an effort to be right. Generally, board members are protected if they rely on information provided by officers of the corporation and the corporation’s attorneys and accountants, unless they have reason to know that the information provided is false or if they know the person providing the information is unqualified to do so. As long as the information appears to be credible and from a credible source, board members may rely upon the data in making decisions.

Similar rules apply to any officers of the church. Like board members, they have a duty of good faith and loyalty to the corporation. As a result, they also have a duty to try to do the right thing.

Choosing a good board is vital to the long-term success of your corporation. The importance of having a Board comprised of the right “THEY” cannot be over emphasized.

Build in the Right Limitations and Protections

Either the Articles or Bylaws should include a statement of activities that the corporation will not engage in. These restrictions are designed to ensure that you will operate your church or ministry in compliance with the essence of the regulations that govern non-profit corporations. Basically, these rules all come down to the fact that you need to operate your ministry for its exempt purposes.

The restrictions go back to the concept and fact that individuals do not own a non-profit corporation. Therefore, the best interest of the organization is the controlling issue and always takes priority over individuals’ interests. As a result, any dealings between a non-profit corporation and those who control it must be fair and arms-length.

Political Involvement

One important restriction relates to what political activities a church or ministry may participate in. The IRS rules do not prohibit all political activities. However, you do need to follow this simple rule of thumb – It is ok to encourage your congregation to be politically active (telling the church members to be sure to vote next Tuesday in the election); and it is ok to teach whether a particular act is right or wrong (telling the church your views on an issue such as abortion); but it is not ok to tell your church who to vote for and it is not ok for the church to expend its funds on political causes or candidates. In other words, you can support issues and activism, but not individual candidates.

Remember, you, as an individual, are separate from the church as an entity. Therefore, the pastor can give his or her personal money to a candidate. A minister can support or endorse a candidate – they just should not do it from the pulpit.

If you are going to permit political candidates to visit your church, we suggest that you invite the candidates from both parties. In addition, there is no problem with inviting office holders to special events, such as dedications or anniversaries. An invitation or an appearance by a political office holder is not an endorsement. Just keep the issues separate.

That being said, it’s never a bad idea to take the time, personally or through delegation, to get to know and develop relationships with governmental leaders who can impact the development of your church. Any large church will find itself frequently doing business with the government, especially local city and county officials. When doing so, relationships can be key.

When it comes to dealing with the government, churches generally operate at a significant disadvantage. Governments need tax revenue to operate, and churches do not pay taxes. This simple fact means that churches, strictly from a taxing standpoint, are liabilities, not assets, to a city government. Therefore, some cities can be less than accommodating to churches. The best way to mitigate this setback is to develop relationships and have a presence in the community that makes your church an asset in a number of ways even better than contributing to the tax base.

Multiple Entities

Sometimes, it is advisable for a church or ministry to form multiple corporations or limited liability companies (LLCs) because of the nature of their activities. Basically, the time and expense of forming additional entities is worth it in two cases. First, when a church engages in high-risk activities, consideration should be given to isolating these activities in a stand-alone corporation. The purpose of this would be to protect the assets of the main church corporation in the event that the corporation housing the high-risk activities is sued and found liable for damages in an amount greater than the available insurance.

A common example is a school. What happens if a teacher, for example, sexually assaults a student and the school is found liable for $10,000,000 in damages but only has $5,000,000 in available insurance. If a stand-alone corporation operates the school, only the assets of that corporation are subject to being seized to pay the judgment. However, if the church operates the school through the same corporation as the church, then the assets of the church are subject to the judgment.

One note here, in some states non-profit corporations are given special protections from many types of lawsuits. If you are in one of those states, your lawyer can take those available protections into account when trying to help you evaluate the risk level of your activities and whether a separate corporation is needed.

The other time a separate corporation is needed is when you want to engage in activities that would create liability for unrelated business income taxes. For instance, real estate investments by the church or other investments in businesses may create unrelated business income. In those cases, it is wise to isolate that income (and the need to pay taxes) in a corporation separate from the church. This will prevent the church from having to file a tax return (and consequently disclosing private financial information).

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