Corporations

By Richard R. Hammar, J.D., LL.M., CPA

© Copyright 1991, 1998 by Church Law & Tax Report.  All rights reserved.  This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service.  If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m14

Two forms of church corporation are in widespread use in the United States. By far the more common form is the membership corporation, which is composed of and controlled by church members. Several states also recognize trustee corporations. The trustees of a trustee corporation constitute and control the corporation. A few states also permit certain officers of hierarchical churches to form corporations sole,¹ a corporation sole being defined as a corporation consisting of a single individual.

In a few states, churches are not permitted to incorporate. For example, the West Virginia constitution specifies that “[n]o charter of incorporation shall be granted to any church or religious denomination.” The validity of such a provision is suspect under the prevailing construction of the first amendment's religion clauses by the United States Supreme Court, for it denies churches a valuable benefit available generally to nonreligious charitable and noncharitable organizations without a sufficiently compelling justification. Legislation has been introduced in the West Virginia legislature that would permit churches to incorporate. So far, no law has been enacted.

Some have maintained that churches should never incorporate since incorporation constitutes a “subordination” of a church to the authority of the state. Before endorsing such a view, one should carefully evaluate two considerations. First, as noted in the preceding section, unincorporated organizations generally are regarded as corporations for tax purposes if they possess most or all of the corporate characteristics of centralized control, continuity, limited personal liability, and transferability of beneficial interests. Ironically, unincorporated churches are considered to be tax--exempt by the IRS because they generally meet the definition of corporation contained in the Internal Revenue Code as interpreted by the courts. Second, and more fundamentally, a corporation is an artificial entity that is entirely separate and distinct from its members. The term corporation has been defined “as an association of persons to whom the sovereign has offered a franchise to become an artificial, juridical person, with a name of its own, under which they can act and contract, sue and be sued, and who have . . . accepted the offer and effected an organization in substantial conformity with its terms.”² A corporation, then, is entirely distinct from its members and should not be confused with them. A church that incorporates is not “subordinating itself” to the state. Rather, it is subordinating merely the artificial corporate entity to the state, and it is free to terminate that entity at any time. Similarly, under some corporation laws, the state can terminate the corporate status of church corporations that fail to file annual reports. But the termination of the church corporation under such conditions certainly does not mean that the church itself is dissolved, for the church is completely independent of the artificial corporate entity and survives its demise. On the contrary, many church corporations have been terminated by operation of law because of noncompliance with the annual reporting requirements, yet church leaders and members alike remain oblivious to the fact.

One court acknowledged that “a church does not lose its ecclesiastical function, and the attributes of that function, when it incorporates. It does not, by incorporating, lose its right to be governed by its own particular form of ecclesiastical government. Incorporation acts merely to create a legal entity to hold and administer the properties of the church.”¹ Another court has observed that “[t]he law recognizes the distinction between the church as a religious group devoted to worship, preaching, missionary service, education and the promotion of social welfare, and the church as a business corporation owning real estate and making contracts. . . . The former is a matter in which the state or the courts have no direct legal concern, while in the latter the activities of the church are subject to the same laws as those in secular affairs.”² And, the United States Supreme Court has ruled that the first amendment guaranty of religious freedom assures churches “an independence from secular control or manipulation, in short, power to decide for themselves, free from state interference, matters of church government as well as those of faith and doctrine.”³

One legal scholar has observed that “the distinctiveness of the corporate entity from the members . . . is inherent in and exemplified by other corporate attributes, which could not be conceded were they one and the same, e.g., the transfer of shares and change in membership without change in the corporation [and] the right to sue and be sued in the corporate name. . . .”⁴ The distinctiveness of the corporate entity from its members is also the basis for the limitation of personal liability of members for the acts of the corporation. This limitation of personal liability is not an example of social irresponsibility that should be avoided by churches. On the contrary, it is a recognition of the fact that church members should not be personally responsible for the wrongdoing of other members or agents over which they had no control.

Clergy having theological opposition to church incorporation should consider letting the church membership determine whether or not to incorporate the church. Church members who are apprised of the potential personal liability they have for the obligations of their unincorporated church may well not share their pastor's theology on this issue.

In summary, churches wanting to avail themselves of the benefits of the corporate form of organization should not be dissuaded by unwarranted fears of governmental control. In the unlikely event that an incorporated church ever does believe that it is being “unduly controlled” by the state, it can easily and quickly rectify the problem by voluntarily terminating its corporate existence. A number of courts have specifically held that incorporation of a church under a state corporation law does not subject the church to any greater degree of civil scrutiny.⁵

The Model Nonprofit Corporation Act, adopted in whole or in part by 33 states,⁶ provides a uniform method of incorporation for several kinds of nonprofit organizations, including religious, scientific, educational, charitable, cultural, and benevolent organizations. The procedure consists of the following steps: (1) preparation of duplicate articles of incorporation setting forth the corporation's name, period of duration, address of registered office within the state, name and address of a registered agent, purposes, and names and addresses of the initial board of directors and incorporators; (2) notarized signature of the duplicate articles of incorporation by the incorporators; and (3) submission of the prescribed filing fee and duplicate articles of incorporation to the secretary of state. The secretary of state reviews the articles of incorporation to ensure compliance with the Act. If the articles of incorporation are satisfactory, the secretary of state endorses both duplicate copies, files one in his or her office, and returns the other along with a certificate of incorporation to the church.⁷ The church's corporate existence begins at the moment the certificate of incorporation is issued.⁸ After the certificate of incorporation has been issued, the Act specifies that an organizational meeting of the board of directors shall be held at the call of a majority of the incorporators for the purpose of adopting the initial bylaws of the corporation and for such other purposes as may come before the meeting.⁹

The incorporators and directors can be the same persons in most states. Many states require at least three directors. Incorporators and directors must have attained a prescribed age and be citizens of the United States. They ordinarily do not have to be citizens of the state in which the church is incorporated.

The Model Nonprofit Corporation Act governs many aspects of a nonprofit corporation's existence, including meetings of members, notice of meetings, voting, quorum, number and election of directors, vacancies, officers, removal of officers, books and records, merger or consolidation with other organizations, and dissolution. In most of these matters, a corporation is bound by the Act's provisions only if it has not provided otherwise in its articles of incorporation or bylaws. For example, a corporation may stipulate in its bylaws the percentage of members constituting a quorum, but if it fails to do so the Act provides that a quorum consists of ten percent of the voting membership.¹⁰ Similarly, the Act provides that directors shall serve for one--year terms unless a corporation's articles of incorporation or bylaws provide otherwise.¹¹

Certain provisions in the Act may not be altered by a corporation. For example, the Act mandates that corporations have a minimum of three directors.¹² Although a corporation may require more than three directors, it may not require less. The Act also prohibits corporations from making loans to officers or directors.¹³

It is important to recognize that most of the provisions of the Act will apply only if a church has not provided otherwise in its articles of incorporation or bylaws. In other words, most of the Act's provisions apply “by default.” To illustrate, one court ruled that proxy voting had to be recognized in a church election since the Act required it and the church had not provided otherwise in its articles or bylaws. The court rejected the church's claim that requiring it to recognize proxy votes violated the constitutional guaranty of religious freedom. The court observed that a church could easily avoid the recognition of proxy votes by simply amending its charter or bylaws to so state.¹⁴ Similarly, another court ruled that “[i]f a church or religious group elects to incorporate under the laws of this state, then the courts have the power to consider and require that the corporation thus formed comply with state law concerning such corporations.”¹⁵ 

One court, however, has ruled that the provisions of a state's nonprofit corporation law cannot be applied to a church if doing so would violate church doctrine. As part of what the court described as a dispute of “a longstanding, ongoing, and heated nature,” certain members of a local Church of Christ congregation in Arkansas sought to obtain various financial records of the church as part of a concerted effort to oust the current church leadership. When church elders rejected the members' request, the members incorporated the church under a state nonprofit corporation law making the “books and records” of a corporation subject to inspection “by any member for any proper purpose at any reasonable time.” Church elders continued to reject the members' request for inspection, whereupon the members asked a state court to recognize their legal right to inspection under state corporation law. The elders countered by arguing that application of state corporation law would impermissibly interfere with the religious doctrine and practice of the church, contrary to the constitutional guaranty of religious freedom. Specifically, the elders argued that according to the church's “established doctrine,” the New Testament “places within the hands of a select group of elders the sole responsibility for overseeing the affairs of the church,” and that this authority is “evidenced by biblical admonitions to the flock to obey and submit to them that have rule over the flock.” The Arkansas Supreme Court agreed that “application of our state corporation law would almost certainly impinge upon the doctrine of the church” as described by the elders, and accordingly would violate the constitutional guaranty of religious freedom. The court concluded that if the application of a state law would conflict with the “doctrine, polity, or practice” of a church, then the law cannot be applied to the church without a showing of a “compelling state interest.” No such showing was made in this case, the court concluded, and therefore the state law giving members of nonprofit corporations the legal right to inspect corporate records could not be applied to the church.¹⁶

The Act requires all nonprofit corporations to file an annual report with the secretary of state's office.¹⁷ A few states have amended this provision to require reports less frequently, such as once every two years. The report is filed on a form provided by the secretary of state, and ordinarily sets forth the name of the corporation, the address of the corporation's registered office in the state of incorporation, the name of the registered agent at such address, the names and addresses of the directors and officers, and a brief statement of the nature of the affairs the corporation is actually conducting. A nominal fee must accompany the report.

States that have adopted the Act differ with regard to the penalties imposed upon corporations that fail to file the annual report by the date prescribed. The Act itself imposes a nominal fine ($50) on corporations that fail to comply with the reporting requirement. Many states have followed this provision, but others call for the cancellation of a corporation's certificate of incorporation. Cancellation of a certificate of incorporation has the effect of terminating the existence of a corporation. This is an extraordinary penalty, generally available only after the secretary of state's office has sent the corporation a written notice of the impending cancellation. If a corporation fails to respond to the written notice, the secretary of state issues a certificate of cancellation, which is the legal document terminating both the certificate of incorporation and the corporation's legal existence. Many states permit reinstatement of terminated corporations. Reinstatement generally is available upon the filing of a formal application within a prescribed time. Because of the potentially adverse consequences resulting from a cancellation of a church's corporation charter, church leaders should periodically check with the office of their secretary of state to ensure that the church is a corporation in good standing. Many churches will find that they are not, either because they failed to file an annual return, or because their corporation was created for a specified period of time that has expired.

In 1987, the American Bar Association's Subcommittee on the Model Nonprofit Corporations Law of the Business Law Section adopted the “Revised Model Nonprofit Corporation Act.” The revised Act, which has been adopted by a few states,¹⁸ is based on the “Revised Model Business Corporations Act.” It likely will be adopted by many states in the years to come. One of the important features of the revised Act is the division of nonprofit corporations into three classifications—(1) public benefit corporations, (2) mutual benefit corporations, and (3) religious corporations.¹⁹ Special rules apply to each classification. This is the first recognition of the unique status of religious corporations in a “model” nonprofit corporations law.

Other new features of the revised Act include the following:

(1) The definition of “members” is clarified. A corporation is required to compile a listing of eligible voters in advance of each annual or special membership meeting, and this list must be available for inspection. However, the Act specifies that “the articles or bylaws of a religious corporation may limit or abolish the rights of a member . . . to inspect and copy any corporate record.”²⁰

(2) The revised Act specifies that “[i]f religious doctrine governing the affairs of a religious corporation is inconsistent with the provisions of this Act on the same subject, the religious doctrine shall control to the extent required by the Constitution of the United States or the constitution of this state or both.”²¹

(3) There is a presumption of perpetual duration unless the articles of incorporation specifically provide otherwise.²²

(4) The board of directors is empowered to act in an “emergency” though a quorum of the board is not present.²³

(5) The Act specifies that “[a] member of a corporation is not, as such, personally liable for the acts, debts, liabilities, or obligations of the corporation.”²⁴

(6) Detailed procedures apply to the suspension or expulsion of members, but these procedures do not apply to religious corporations (they apply only to public benefit corporations and mutual benefit corporations).²⁵

(7) A corporation “may provide in its articles or bylaws for delegates having some or all of the authority of members.”²⁶

(8) Civil courts are empowered to call meetings of a corporation upon the application of any member if the corporation fails to conduct an annual or special meeting within a prescribed number of days after a specified meeting.²⁷ A court also may determine those persons who constitute members for purposes of any such meeting, and may “enter other orders necessary to accomplish the purpose or purposes of the meeting.”

(9) Unless prohibited by the corporate charter or bylaws, members are permitted to act without a meeting if 80 percent or more of the membership agrees to a proposed action in a signed writing. Similarly, members may act by “written ballot” without calling a meeting if such action is not prohibited by the corporate charter or bylaws.²⁸

(10) The Act specifies that “[u]nless one--third or more of the voting power is present in person or by proxy, the only matters that may be voted upon at an annual or regular meeting of members are those matters that are described in the meeting notice.”²⁹

(11) The board of directors must consist of at least three directors.³⁰

(12) The Act specifies a procedure for removing directors from office, but permits religious corporations to provide otherwise in their charters or bylaws.³¹

(13) The Act imposes specific “standards of conduct” upon each officer and director of a nonprofit corporation. These include the performance of an officer's or director's official duties “in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director [or officer] reasonably believes to be in the best interests of the corporation.”³²

(14) The Act contains detailed indemnification rules.³³ (15) The Act gives each member the right to inspect (and copy) corporate records “at a reasonable time and location” if a member “gives the corporation written demand at least five business days before the date on which the member wishes to inspect and copy.” Corporate records include the articles of incorporation, bylaws, board resolutions, minutes of membership meetings, all written communications to members within the preceding three years, a list of the names and addresses of directors and officers, and the current annual report submitted to the secretary of state. Some limitations apply. Further, the Act provides that “the articles or bylaws of a religious corporation may limit or abolish the right of a member under this section to inspect and copy any corporate record.”³⁴

(16) The Act specifies that “[e]xcept as provided in the articles or bylaws of a religious corporation, a corporation upon written demand from a member shall furnish that member its latest annual financial statements . . . .”³⁵

Some churches prefer not to incorporate under the Model Nonprofit Corporation Act (or the Revised Model Nonprofit Corporation Act). This decision ordinarily is based one or more of four considerations. First, churches do not want to be bothered with the annual reporting requirements. Although these requirements normally are not burdensome, they must be rigidly followed if a church is to avoid fines and in some states the loss of its corporate status. Second, many churches regard the Model Nonprofit Corporation Act as too restrictive since it regulates virtually every aspect of corporate organization and administration. The Act does specify that most of its provisions are applicable only if a corporation has not provided otherwise in its articles of incorporation or bylaws. However, churches often are unwittingly controlled by the Act through their failure to adopt articles or bylaws dealing with particular aspects of organization and administration that are addressed in the Act. Some churches of course consider this to be an advantage, for it means that there will be authoritative direction on most questions of church administration. Third, the Act was based largely on the Model Corporation Act for business corporations, and therefore fails to adequately recognize the substantial differences between nonprofit and for--profit enterprises.³⁶ Fourth, some clergy maintain that churches should not incorporate as “nonprofit” organizations since this would suggest that they are “unprofitable” or of no social or spiritual benefit. In this regard, one court has observed that the term not--for--profit refers only to monetary profit and does not include “spiritual profit,” and therefore a church properly can be characterized as “not--for--profit” even though it “receives some type of profit from its public works in the form of the feeling of achievement and satisfaction the contributors derive from their good work or the enhancement of the image of the organization and its members in the eyes of the community.”³⁷  

One final word regarding incorporating under the Model Nonprofit Corporation Act or the Revised Model Nonprofit Corporation Act. Remember that many of the provisions of both laws apply “by default”—meaning that they will apply unless a church has provided otherwise in its articles of incorporation or bylaws. Accordingly, churches that are incorporated under either of these laws, or that are considering doing so, must carefully review the language of the law to be sure they understand the applicable provisions. Any desired changes must be made in the church's articles or bylaws.

It is important to distinguish between the terms nonprofit and tax--exempt. Nonprofit corporations generally are defined to include any corporation whose income is not distributable to its members, directors, or officers. The fact that an organization incorporates under a state's nonprofit corporation law does not in itself render the corporation exempt from federal, state, or local taxes. Exemption from tax generally is available only to those organizations that have applied for and received recognition of tax--exempt status. In some cases the law recognizes the tax--exempt status of certain nonprofit organizations and waives the necessity of making formal application for recognition of exempt status. For example, “churches, their integrated auxiliaries, and conventions or associations of churches” are exempted from federal income tax without the need of making formal application.³⁸ Thus, unless a nonprofit corporation applies for and receives recognition of tax--exempt status or is expressly recognized by law to be exempt from tax without the necessity of making formal application, it will not be considered tax--exempt.

b. Special Statutes

Several states have adopted statutes that pertain exclusively to the incorporation and administration of specific religious denominations. Such statutes typically apply only to churches affiliated with specified denominations or religions. New York has statutes covering over thirty--five religions and denominations, and Michigan and New Jersey each provides for over twelve. Most of the statutes providing for the incorporation of churches of specified denominations also have enacted general nonprofit corporation laws. Churches generally can elect to incorporate under either the general nonprofit or the special religious corporation law.³⁹

Such statutes have been upheld against the claim that they “entangle” the state in religious matters contrary to the “nonestablishment of religion clause” of the first amendment to the United States Constitution.⁴⁰ The Supreme Court has upheld the validity of such statutes,⁴¹ and has approved reference to them as a permissible way to resolve church property disputes.⁴²

The United States Supreme Court has observed that “[a]ll who unite themselves to [a church] do so with an implied consent to its government, and are bound to submit to it.”⁴⁴ A church's “government” generally is defined in its charter, constitution, bylaws, resolutions, and practice. Numerous courts have observed that the articles of incorporation and bylaws of a church constitute a “contract” between the congregation and its members.⁴⁵ Accordingly, it is important to define these documents in some detail.

The application for incorporation generally is called the articles of incorporation or articles of agreement. This document, when approved and certified by the appropriate government official, is commonly referred to as the corporate charter.⁴⁶ It is often said that the corporate charter includes by implication every pertinent provision of state law.⁴⁷

Church charters typically set forth the name, address, period of duration, and purposes of the corporation; the doctrinal tenets of the church; and the names and addresses of incorporators and directors. However, they rarely contain rules for the internal government of the corporation. For this reason, it is desirable and customary for churches to adopt rules for their internal operation. One court has observed that “it has been uniformly held that religious organizations have the right to prescribe such rules and regulations as to the conduct of their own affairs as they may think proper, so long as the same are not inconsistent with . . . the law of the land.”⁴⁸ Such rules ordinarily are called bylaws, although occasionally they are referred to as a constitution or a “constitution and bylaws.” The terms bylaws and constitution often are used interchangeably. Technically, however, the terms are distinguishable—bylaws referring generally to the rules of internal government adopted by a corporation, and constitution referring to the supreme law of a corporation.⁴⁹ Correctly used, the term constitution refers to a body of rules that is paramount to the bylaws. It may refer to the charter or to a document separate and distinct from both the charter and bylaws. Church corporations that differentiate between a constitution and bylaws ordinarily do so on the basis of amendment procedures, with the amendment of the church constitution requiring a larger majority vote than an amendment of the bylaws.

It makes no sense for a church corporation to have both a “constitution” and a separate set of “bylaws” unless the constitution is made superior to the bylaws either by express provision or by a more restrictive amendment procedure. Identifying a single body of rules as the “constitution and bylaws” without any attempt to distinguish between the two is a common but inappropriate practice. Obviously, the best practice would be to set forth the corporation's purposes and beliefs in the corporate charter, and to have a single body of rules for internal government identified as bylaws. At a minimum, church bylaws should cover the following matters: (1) qualifications, selection, and expulsion of members; (2) time and place of annual business meetings; (3) the calling of special business meetings; (4) notice for annual and special meetings; (5) quorums; (6) voting rights; (7) selection, tenure, and removal of officers and directors; (8) filling of vacancies; (9) responsibilities of directors and officers; (10) method of amending bylaws; and (11) purchase and conveyance of property.⁵⁰ Other matters that should be considered for inclusion with church bylaws include: (12) adoption of a specific body of parliamentary procedure; (13) a clause requiring disputes between church members, or between a member and the church itself, to be resolved through mediation or arbitration; (14) a clause specifying how contracts and other legal documents are to be approved and signed; (15) signature authority on checks; (16) “bonding” of officers and employees who handle church funds; (17) an annual audit by independent certified public accountants; (18) an indemnification clause; (19) specification of the church's fiscal year; and (20) “staggered voting” of directors (a portion of the board is elected each year—to ensure year--to--year continuity of leadership).

Church bylaws commonly contain ambiguous language, and this is a major source of church disputes. It is essential for church bylaws to be reviewed periodically by the board, or a special committee, to identify ambiguities and propose modifications. Will the civil courts interfere in a church dispute over the meaning of ambiguous bylaw provisions? Generally, the civil courts have been willing to interpret contested terminology in church bylaws so long as the inquiry does not involve questions of religious doctrine or polity. To illustrate, a Lutheran church's constitution provided that “the candidate receiving the majority of all votes cast shall, upon unanimous approval, be declared elected.” The church convened a congregational meeting to vote on a pastoral candidate, and the candidate received a majority of the votes cast (but not “unanimous approval”). The candidate was subsequently employed, and a group of dissidents filed a lawsuit asking a civil court to enforce the church's constitutional requirement of “unanimous approval.” While noting that the first amendment prohibits a court “from entangling itself in matters of church doctrine or practice,” the court concluded that it could resolve controversies, such as this one, involving the interpretation “of an ambiguous provision in what amounts to a contract between the members of the congregation, dealing with a purely procedural question” and involving “no ecclesiastical or doctrinal issues.” The court also noted that it found no “dispute resolution process” within the denomination to which it could defer.⁵¹

Similarly, a court agreed to interpret a clause in a church's bylaws specifying that “a pastor may be terminated by the church congregation . . . but only if . . . the vote equals or exceeds three--fourths of the voting members present.” A church voted to oust its pastor at a duly called meeting by a vote of 18 of the 26 members present (the remaining 8 members did not vote). The pastor refused to acknowledge that the vote resulted in his dismissal, since less than “three--fourths of the voting members present” had voted to dismiss him (18 is only 70 percent of 26). Several disgruntled members of the congregation disagreed with this interpretation, and petitioned a court for a ruling recognizing that the congregational vote had resulted in the dismissal of the pastor. The members argued that the phrase “three--fourths of the voting members present” should be interpreted to mean three--fourths of the individuals who actually cast votes at the business meeting rather than three--fourths of all members actually present and eligible to vote. Since all 18 of the persons who actually voted at the meeting voted to dismiss the pastor, 100 percent of the votes were cast in favor of dismissal. A state appeals court ruled that the pastor had not been lawfully dismissed in the meeting in question. The court relied on Robert's Rules of Order, which had been adopted by the church (in its bylaws) as the governing body of parliamentary procedure, as support for its conclusion that the phrase “three--fourths of the voting members present” means three--fourths “of the individuals present and eligible to vote.” Accordingly, the pastor had not been dismissed by the congregational vote since less than three--fourths of the members present and eligible to vote had voted to dismiss him.⁵²

The subject of civil court interpretation of ambiguous language in church bylaws is addressed further in section G of this chapter Members.

The income tax regulations require that the assets of a church pass to another tax--exempt organization upon its dissolution.⁵³ The IRS has stated that the following paragraph will satisfy this requirement if contained in a church corporation's articles of incorporation:

Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by the Court of Common Pleas of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.⁵⁴

It would be very unusual for a church to use this suggested language without modification. Most churches prefer to specify the religious organization to which their assets will be distributed in the event of dissolution rather than leaving this determination to a judge's discretion. There is no assurance, under the suggested IRS language, that a dissolved church's assets would even go to another religious organization. For example, a judge could transfer a dissolved church's assets to a city or state government, or to a non--religious charitable organization, under the IRS language. Of course, churches wishing to designate a religious organization in their dissolution clauses should condition the distribution upon that organization's existence and tax--exempt status at the time of the distribution. The IRS generally will require this.

The Internal Revenue Manual, and IRS Publication 557, both require that an appropriate dissolution clause appear in a church's articles of incorporation. It is doubtful that inclusion of such a clause in a church's bylaws would be considered acceptable to the IRS, and such a practice should be avoided. However, the IRS has conceded that no dissolution clause is required if state law requires that the assets of a dissolved church corporation (or other charitable corporation) be distributed to another tax--exempt organization.⁵⁵ The IRS has stated that this special provision does not apply to unincorporated churches, since no state “provides certainty by statute or case law, for the distribution of assets upon the dissolution of an unincorporated nonprofit association. Therefore, any unincorporated nonprofit association needs an adequate dissolution provision in its organizing document . . . .”⁵⁶

The IRS also suggests that the following two paragraphs be placed in a church corporation's articles of incorporation:

Said corporation is organized exclusively for charitable, religious, and educational purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in [these articles]. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding provision of any future federal tax code, or (b) by a corporation contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or corresponding section of any future federal tax code.⁵⁷

Inclusion of the preceding paragraphs in a church's articles of incorporation helps to ensure the continued recognition of its tax--exempt status. The requirements for exemption from federal income taxation are considered in detail in chapter 14 Federal Income Taxation.

Ordinarily, it is advisable for a church to state its purposes in terms of “charitable, religious, and educational” activities, since this will allow the greatest operational flexibility and will minimize problems. For example, if a church wishes to establish an elementary school, its authority to do so will be indisputable if its purposes are “charitable, religious, and educational.” Similarly, a church clearly has the authority to build a nursing home if its purposes are “charitable, religious, and educational,” since care for the aged is without question a charitable function. A church may believe that education and nursing care are religious functions too, but the IRS does not necessarily agree with this conclusion.

Corporate resolutions are not bylaws. A resolution is an informal and temporary enactment for disposing of a particular item of business, whereas bylaws are rules of general applicability. For example, a minister's “housing allowance” generally is designated by his or her church board in a resolution. A church's business expense reimbursement policy or medical insurance reimbursement plan ordinarily appear in resolutions of the church board.

Occasionally, conflicts develop among provisions in a corporation's charter, constitution, bylaws, and resolutions. It is well--settled that provisions in a corporate charter take precedence over conflicting provisions in a corporation's constitution, bylaws, or resolutions. Thus, when a church charter provided for seven trustees and the church's bylaws called for nine, the charter provision was held to control.⁵⁸ Another court ruled that “religious and quasi--religious societies may adopt a constitution and bylaws for the regulation of their affairs, if conformable and subordinate to the charter and not repugnant to the law of the land . . . .”⁵⁹ If the constitution is separate and distinct from the bylaws and is of superior force and effect either by expressly so providing or by reason of a more difficult amendment procedure, then provisions in a corporation's constitution take precedence over conflicting provisions in the bylaws.⁶⁰ Thus, where a church constitution specified that a pastor was to be elected by a majority vote of the church membership and the bylaws called for a two--thirds vote, the constitution was held to control.⁶¹ Resolutions of course are inferior to, and thus may not contradict, provisions in a corporation's charter, constitution, and bylaws.

The power to enact and amend bylaws is vested in the members, unless the charter or bylaws grants this authority to some other body. Occasionally, trustees or directors are given the authority to enact and amend bylaws. Procedures to be followed in amending the bylaws should be and usually are set forth in the bylaws. Such procedures must be followed.

The state law under which a church is incorporated will specify the procedure to be followed in amending the corporate charter. Generally, a charter amendment must be filed with and approved by the state official who approved the charter. The Washington Supreme Court ruled that a church's board of elders was powerless to amend the church's articles of incorporation without the pastor's approval.⁶² The church's articles of incorporation specified that neither the articles nor the bylaws could be amended without the pastor's approval. After allegations of sexual misconduct on the part of the pastor surfaced, the board of elders decided to conduct hearings into the matter. At the conclusion of these hearings, the board adopted a resolution placing the pastor on “special status.” This meant that he could resume his duties as pastor of the church, but he would not be permitted to be alone with any females. This decision was announced to the church congregation in a special meeting. The pastor refused to accept this special status or to honor the board's decision. Instead, he announced to the congregation that he was not under the authority of the elders and that he would resume his role of pastor without restriction. The board convened a meeting with the pastor in an attempt to reach a compromise. When it was clear that no agreement was possible, the board members voted to amend the articles by removing the provision requiring the pastor to approve all amendments to the articles. They also voted to remove the pastor from office because of his breach of his “fiduciary duties” to the corporation. The pastor immediately filed a lawsuit asking a civil court to determine whether or not the elders had the authority to amend the articles without his approval. A trial court ruled in favor of the elders, and the pastor appealed.

The Washington Supreme Court ruled in favor of the pastor. It reasoned that the articles clearly specified that they could not be amended without the pastor's approval, and that as a result the elders' attempt to amend the articles without the pastor's approval was null and void. The court observed: “Neither of the parties has called to our attention any case holding that any corporation law in the country, profit or nonprofit, prohibits a provision in the articles of incorporation requiring the concurrence of a special individual to amend the articles.” The court agreed that the church's articles “might well, in retrospect, be viewed by some as an improvident provision,” but it concluded that “it is not the function of this court . . . to protect those who freely chose to enter into this kind of relationship.”

Unincorporated Associations

Church Records

Reporting Requirements for Churches

Church Names

Church Officers, Directors, and Trustees

Church Members

Church Business Meetings

Removing Disruptive Individuals

Powers of a Local Church

Church Merger and Consolidation

Dissolution of a Church