Churches were traditionally formed as voluntary associations without the formality of incorporation. In some states, most notably Virginia, incorporation of churches was not allowed until the Supreme Court ruled this denial unconstitutional.
Unincorporated churches have several handicaps. They are often not allowed to own property in their own name. They create confusion as to who they are when conducting business with other entities. They also face sticky issues when internal controversies arise.
Currently there is no good reason for a church not to incorporate. Incorporation does not forfeit any religious freedoms that the church would otherwise enjoy. Incorporation also allows the church to own property, enter contracts, transact business and operate generally with a minimum of confusion and complication.
Taxes, Taxes, Taxes!
While many churches are preoccupied with income tax exemption for their donors (501(c)(3) status), there are many other tax issues that churches need to consider.
The Unrelated Business Income Tax (UBIT) is relevant to church income for activities that are not part of the church's exempt purpose and that compete with for-profit entities.
Property taxes are levied by state law. Many states exempt churches from this tax, but each church must understand the nature and conditions of any exemption.
Many states offer a sales tax exemption to churches. Churches need to obtain the appropriate documentation for this exemption. Churches also need to understand the application of use taxes that relate to their organization.
Employment Laws and the Church
There are a number of employment laws that apply to churches, and others that provide exceptions for churches.
Title VII - Churches may discriminate on the basis of religion, but not any other protected category.
FLSA - Wage and Hour laws (minimum wage and overtime) apply to churches. While clergy and any qualified "exempt" employees are exempt, non-exempt employees are protected by this law.
FMLA - Churches with more than 50 employees are subject to this law. Many states have state equivalents that apply to employers with fewer employees.
Workers' Compensation - While some states allow employers with fewer than a certain number of employees to opt out of the system, churches that do not participate will be exposed to civil lawsuits for negligence causing injury to employees.
Church Property Issues
The Religious Land Use and Institutionalized Persons Act (RLUIPA) provides protection for churches against local government discrimination based on zoning ordinances and other land use restrictions.
However, building codes and other land use regulations generally apply to churches.
Church leaders need to be aware of the laws and ordinances that apply to the maintenance and use of their facilities.
Church Membership Issues
More than any other type of organization, legal regulation of and liability for conduct related to church membership is extremely complicated.
While courts generally find any excuse possible to avoid dealing with church membership problems, cases involving defamation and invasion of privacy are a more menacing threat to church leaders than ever before.
Church leaders need to understand both the protections and responsibilities imposed on them by the law when dealing with membership issues.
Creating a Risk Management Mentality
Most church leaders (both clergy and law leaders) are focused predominantly on their spiritual mission. This is a good thing, but it sometimes leads to decisions that turn out to be unwise.
Church leaders need to work consistently at balancing their ministry goals with solid and appropriate risk management principles to ensure the safety of their participants and the long-term health of the church.
It is always best to remember that avoiding a crisis will always be better than correctly handling the crisis when it arises.
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