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Churches and Charities – Advantages and Disadvantages of Incorporation

If you are actively involved in the leadership of a church or charity that is not currently incorporated, then chances are that the issue of incorporation has been a discussion item on the agenda of more than one meeting. Leaders of unincorporated churches and charities have often heard that it is prudent from a legal standpoint to conduct the activities of a church or charity through a corporation, but are unclear as to the reasons why incorporation is a prudent course of action. When considering whether to incorporate a church or charity, the leadership of the church or charity should be aware of the advantages and disadvantages of incorporating the church or charity, in order to make an informed decision. The discussion that follows is intended to provide the reader with some idea as to the advantages and disadvantages involved in incorporating their church or charity.

Advantages of Incorporating Your Church or Charity

An understanding of the advantages of incorporating your church or charity must begin with an understanding of the legal nature of a church or charity that operates as an unincorporated association of individuals. Although you may consider your unincorporated church or charity to be an institution in and of itself, consisting of the sum total of the individuals who have voluntarily decided to associate together, the law does not treat an unincorporated association of individuals as having any legal existence separate from the individuals who are members of the unincorporated association. In essence, the law “looks through” the unincorporated church or charity and considers the activities of such unincorporated church or charity to be conducted by the individuals who are members of such unincorporated association. In contrast, upon incorporation, an incorporated church or charity becomes a legal “person”, separate and apart from the members of the incorporated church or charity. In essence, when the law looks at the incorporated church or charity, it sees a corporation and considers the activities of such incorporated church or charity to be conducted by the corporation itself. This has a number of important implications relating to potential liability for the activities of incorporated church or charity and provides a number of advantages that unincorporated churches and charities do not enjoy at law.

Advantage # 1: Limited Liability for Members

The main advantage of incorporating your church or charity, which usually acts as the motivating force behind the decision to incorporate, is the limited liability that incorporation provides to the members of an incorporated church or charity. Unfortunately, law suits naming churches and charities as defendants are being advanced with increasing frequency. With litigation on the increase, members of churches and charities who are eager to support the activities of the church or charity are understandably concerned about protecting their personal assets while being actively involved in their church or charity. The incorporating statutes specifically provide that the members of the corporation are not to be held liable or responsible for any act, default, obligation or liability of the corporation. This legal protection from liability is not available to members of unincorporated churches or charities, meaning that the members of these unincorporated associations may be held personally liable for the debts or liabilities of the unincorporated church or charity. In the event that a member of an unincorporated church or charity were successfully sued, his or her personal assets would be available to satisfy the judgment of any judgment creditor.

Advantage # 2: Indemnification of Directors and Officers

If you are actively involved in the leadership of your church or charity, incorporation provides the leadership of the incorporated church or charity with a further advantage in the area of indemnification. The incorporating statutes permit an incorporated church or charity to pass by-laws providing for the indemnification of the directors and officers of the incorporated church or charity from and against any legal claims made against such individuals by third parties. In the event that a director or officer of the incorporated church or charity were successfully sued as a director or officer, provided the incorporated church or charity had such an indemnification by-law in place, the incorporated church or charity could reimburse the director or officer for any costs incurred by him or her in defending the lawsuit.

Advantage # 3: Involvement in Litigation

As discussed above, churches and charities are increasingly becoming involved in litigation. Since an incorporated church or charity has a separate legal personality in the eyes of the law, it is capable of commencing and defending lawsuits in the name of the incorporated church or charity, whereas a lawsuit involving an unincorporated church or charity would necessarily involve the naming of the members of the unincorporated church or charity as parties to any action. As anyone who has been a party in a lawsuit will attest, litigation can be a very stressful process. The last thing a member of a church or charity wants to do is be named as a defendant in a lawsuit.

Advantage # 4: Owning and Dealing with Real Property and Personal Property

Incorporation permits the incorporated church or charity to hold legal title to real property and personal property in the name of the incorporated church or charity. An unincorporated church or charity is not capable of owning property. This is of particular concern in the case of unincorporated churches. Under the provisions of the Religious Organizations’ Lands Act, an unincorporated church is not able to hold legal title to real property. If the unincorporated church wants to purchase, sell or mortgage a piece of real property to be used in its activities, it must do so through trustees. The Religious Organizations Land Act permits a religious organization to purchase, sell, lease and hold real property in the name of trustees on behalf of and for the benefit of the religious organization for a limited number of purposes, which may not be broad enough to encompass all of the charities activities. The individuals appointed as trustees are subject to a number of common law fiduciary obligations and potential liability. Incorporation eliminates the need to appoint trustees to hold title to real property and personal property on behalf of the unincorporated church or charity and simplifies a number of complex issues surrounding ownership and dealing with property.

Disadvantages of Incorporating Your Church or Charity

As with any decision, there are certain disadvantages in choosing to incorporate a church or charity; however, these are minor in relation to the significant advantages that incorporation offers a church or charity.

Disadvantage #1: The Cost of Incorporation

Incorporation costs money, both in terms of legal fees and disbursements. Some unincorporated churches and charities attempt to ameliorate this disadvantage by incorporating without retaining legal counsel to assist them through the process. This is not advisable. A church or charity considering incorporation should retain the services of a lawyer with experience in incorporating churches and charities in order to assist them through the process and to give them proper advice. The costs involved in paying a lawyer to assist a church or charity through the incorporation process are far outweighed by the costs involved in retaining a lawyer to fix an incorporation of a church or charity that has been done improperly by the church or charity in the first instance.

Disadvantage #2: Government Filing Requirements

The incorporated church or charity is going to be subject to a variety of statutory reporting requirements, particularly when a change in the corporation occurs relating to a change in directors, officers or a change in the location of the corporation’s head office.

Disadvantage #3: Statutory Record-Keeping Requirements

The incorporated church or charity is going to be subject to the requirements of the incorporating statute concerning on-going record-keeping. The incorporating statutes require the corporation to maintain minutes of each meeting of the members and directors of the incorporated church or charity. The incorporating statutes also require the incorporated church to keep other books and records; however, an unincorporated church or charity that is governing itself properly should already be keeping these records.

Disadvantage #4: Time and Effort Involved in Drafting an Appropriate General Operating By-Law

Each unincorporated church or charity is different: each has its own particular charitable objects, conducts its own particular activities and possesses its own philosophy concerning how the church or charity should be structured and how it should be governed. The church or charity and lawyer must work together to draft a general operating by-law for the church or charity that complies with the statutory requirements and common law duties imposed on incorporated churches and charities while maintaining a workable organizational structure that reflects the way in which the church or charity desires to operate. Adopting a cookie-cutter, one-size-fits-all general operating by-law is not an advisable course of action. Drafting an appropriate general-operating by-law takes time and effort; however, if the church or charity is willing to go through the process, in the end it will have a comprehensive general operating by-law that fits with how the church or charity operates in actual fact.

The purpose of this article is to provide interested readers with general legal information relating to some of the advantages and disadvantages involved in incorporating a church or charity. It is not intended to be relied upon as specific legal advice, nor to be relied upon by the reader in making any specific legal decisions. Readers interested in incorporating their church or charity should speak with a lawyer experienced in incorporating churches and charities to discuss their particular situation.

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