The Process of Incorporating a Church
Recognizing the clear benefits of church incorporation, the South Carolina Baptist Convention has long encouraged its member churches to incorporate. Incorporation limits the liability of individual church members and makes it easier for churches to buy, sell, and finance property. See “Why Should a Church Incorporate?” Focus, winter 2008. Unfortunately, many churches remain unincorporated because they believe the incorporation process to be laborious and expensive.
With the aid of a knowledgeable attorney, the process is relatively simple. Attorney assistance is highly recommended because the incorporation of a church must be handled carefully, correctly, and in compliance with South Carolina law. Otherwise, the benefits incorporation offers will be lost. A church that is not properly incorporated will likely be treated as an unincorporated association, exposing its members to liability for the church’s obligations. Furthermore, the expense of correcting errors in the process may be considerable.
Converting an existing church from an unincorporated association into a church corporation involves three phases. The first phase is the formation of the corporate entity. This phase begins with the unincorporated church voting to incorporate, utilizing the procedure established by its existing by-laws. That procedure must be strictly followed to avoid later challenges to the propriety of the decision to incorporate. Once church approval is properly secured, the Articles of Incorporation are prepared and filed with the South Carolina Secretary of State. A federal tax identification number for the new church corporation is then obtained from the Internal Revenue Service. Articles of Incorporation are typically the most difficult corporate documents to amend and they must comply with both federal and South Carolina law, most notably the South Carolina Nonprofit Corporation Act.
Some church leaders mistakenly believe this Phase I is the only phase in the incorporation process. In reality, the first phase only produces a shell corporation without assets that lacks rules and framework for its governance. Two equally important phases remain.
Phase II involves the preparation and adoption of bylaws to govern the new corporate entity. Bylaws describe the purpose for which the corporation exists, establish the framework for corporate governance, provide for the rights of members, and set forth those rules considered so important that they should not be changed without formal amendment of the bylaws. South Carolina law requires all nonprofit corporations, including incorporated churches, to adopt bylaws.
The bylaws of an incorporated church must comply with the requirements of the Nonprofit Corporation Act. The Nonprofit Corporation Act contains numerous default rules that apply when a corporation’s bylaws fail to address certain issues. For this reason, a church’s bylaws should be very thorough and include provisions that modify the Nonprofit Corporation Act’s default rules where necessary. For example, one default rule under the Nonprofit Corporation Act gives members the right to review the financial records of the corporation. Without a bylaws provision altering this default rule, a member of an incorporated church could claim a statutory right to review the contribution records of other members, something most churches would likely find undesirable. Furthermore, certain bylaws provisions may be required for a church to obtain or maintain tax-exempt status. For these reasons, it is highly recommended that church leaders have their bylaws—and any amendments thereto—reviewed by a qualified attorney prior to final approval by the membership.
The third and final phase in the incorporation process is the formal transfer of all property owned by the unincorporated church to the new church corporation. When this Phase III is completed, all real and personal church property formerly owned by the unincorporated association is titled in the name of the corporate entity. This greatly benefits the church by avoiding difficult issues relating to the holding of property by trustees. Since this phase will require a title search—in which the official property records are reviewed to confirm ownership and identify any encumbrances—and the preparation of deeds and bills of sale, the assistance of a real estate attorney is strongly recommended.
Once all three phases are completed, the church is transformed from an unincorporated association into a legally valid nonprofit corporation. As a result of this transformation, and pursuant to the Nonprofit Corporation Act, the church acquires the same powers as an individual to do all things necessary or convenient to carry out its affairs in its own name. These powers include the ability to buy, sell, lease, and mortgage property, enter into contracts, and borrow or lend money, all in the name of the church corporation rather than in the name of a representative or trustee. Additionally, and perhaps more importantly, individual church members will be better shielded from the liabilities of the church.
If you are interested in learning more about the incorporation process or would like to incorporate your church, please contact a knowledgeable attorney in your area for assistance. There may even be an attorney in your congregation willing to answer questions or assist you with the process. If not, the South Carolina Baptist Convention can be of assistance.
Robert T. Strickland and Matthew G. Gerrald email@example.com
Tom Strickland has practiced law with the Columbia firm of Barnes, Alford, Stork & Johnson, LLP since 1984. He has represented and advised many churches and religious organizations throughout South Carolina on a wide range of issues. He also serves as Chairman of the Richland/Lexington Disabilities and Special Needs Board.
Matt Gerrald is an attorney with the Columbia firm of Barnes, Alford, Stork & Johnson, LLP. He is a member of the Christian Legal Society and has been commissioned as a Blackstone Fellow by the Alliance Defense Fund.