Why Should a Church Incorporate?
Legal experts within and outside the religious community have long advocated that churches incorporate. Despite those efforts, many churches remain unincorporated, and the law considers them to be unincorporated associations. Studies suggest approximately 537 member churches of the South Carolina Baptist Convention are not incorporated.
Why is incorporation so important? Consider the following scenario. Your unincorporated church decides to take out a loan for one reason or another, so a church leader—perhaps a pastor, a deacon, or committee chair—applies for a loan on behalf of the church. The bank approves the loan and disburses the funds in exchange for a promissory note in which the church promises to repay the loan with interest. Several years later, the church encounters some unfortunate financial problems and is unable to make its loan payments. The bank files a lawsuit against the church to collect the loan balance. Would you, an otherwise innocent church member, be at risk in such a situation?
That is what happened in the case of Elliott v. Greer Presbyterian Church, a case the South Carolina Supreme Court decided in 1936. In Elliott, a bank sued a church to collect on a promissory note. Because the church was unincorporated, the trial court held that by statute, when the lawsuit was served on the church, all persons who were members of the church at the time of the execution of the note became parties to the lawsuit. “As against creditors,” the trial court stated, “each member is individually liable for the entire debt[.]” The South Carolina Supreme Court upheld the lower court’s ruling, which did two significant things. First, it allowed the bank to enter judgment against any church member or members for the full amount of the debt, plus interest and attorneys’ fees. Second, it ordered the church to provide the bank with church records showing the names of the persons who were members of the church at the time the promissory note was executed.
While Elliott is admittedly an older case, its holding has never been overruled. Our courts may one day reconsider the issue, but until then the Elliott ruling remains law in South Carolina. The statutes that the Elliott court relied upon are still in force. One of those statutes specifically provides that any individual member may be held liable for a judgment entered against an unincorporated association, a fact the Supreme Court of South Carolina reiterated in a published opinion as recently as 1991.
In addition to lawsuits on contractual obligations, churches also face claims for such things as personal injury, harassment, and defamation. Claims related to sexual misconduct are also on the rise. Historically speaking, such lawsuits against churches were rare. Most states, including South Carolina, recognized the doctrine of charitable immunity, which shielded churches and other charitable organizations from many such claims. However, South Carolina abolished that common law doctrine in 1981. In 1994, the South Carolina Legislature passed legislation that limited the amount that can be recovered from a charitable organization for private or civil wrongs other than breach of contract. The statute also granted some protection to employees of the charitable organization who did not act in a reckless, willful, or grossly negligent manner. However, this statutory protection is much more limited than the charitable immunity doctrine it replaced.
As the barriers limiting recovery against churches have dwindled over the past few decades, many churches have failed to take perhaps the single most important step towards protecting their innocent members from exposure to liability for claims: incorporation. The law treats an incorporated church as a legal entity. Church members who do not actually participate in the wrongdoing that leads to a claim are generally shielded from the liabilities of the church, in much the same way shareholders of publicly traded corporations are protected from corporate obligations.
Incorporation also benefits churches by making it easier to buy, sell, and finance church property. Most unincorporated churches hold title to real estate through trustees. Over time, trustees change and often the deeds and other church records are not kept up to date. The property of incorporated churches is titled in the church’s name. Since incorporated churches are legal entities, they can enter into contracts and hold title to property.
With the risks of remaining unincorporated so great and the benefits of incorporating so clear, why have so many South Carolina churches failed to incorporate? Many are likely unaware of the risks of remaining unincorporated. Others are aware of the risks but believe the incorporation process to be laborious and expensive. However, the truth is that the legal risks facing churches in today’s increasingly litigious world are greater than ever before, and incorporation is a relatively simple and inexpensive way to better protect innocent church members in the unfortunate event of a lawsuit against their church.
Check the South Carolina Secretary of State’s website (www.scsos.com) to see if your church is incorporated. If it is not, speak with your church leadership and urge them to consider incorporation.