Two hundred years ago the issue of incorporation for churches wasn't an issue at all. Only in recent years has the question of whether to incorporate or not been an issue at all. But today it is a very divisive issue within the Church. This page is not an attempt to cover every aspect of this debate, but just to act as an overview of the subject.
Incorporation is the creation of a legal entity in the eyes of the state. Incorporation is not required for tax-exempt status in the eyes of the US government. Incorporation is a voluntary process.
Incorporation does not change the legal requirements of a church not to endorse political causes or candidates from the pulpit, however. That is tied
This is accomplished through a very simple process of filing a set of incorporation papers with your local state. The incorporation papers generally include the Name of the corporation, address, purpose for the corporation, and the people forming the trustees of the corporation. The trustees of the corporation are usually the board of elders of the church, with the pastor as CEO of the corporation. Membership into the church will automatically mean membership into the corporation.
The articles of incorporation will normally include several things that the corporation/church will be expected by law to abide by. This includes a system of bylaws that govern how the church will be organized. For churches that are part of a denomination, this is very simple as the papers can simply say that the church will act in accordance with the bylaws set forth in the denominational handbook. Independent churches, however, will need to spell out those bylaws.
As a church usually works within a larger group, part of the articles of incorporation also include a clause that says what will happen in the event the corporation/church closes. That normally involves saying that the property and assets go to the denomination. Otherwise, the assets will need to go to some other charitable cause or group and not to an individual because no individual is allowed to directly profit from a non-profit organization's assets.
As a church is a non-profit organization, the articles of incorporation normally include a section that specifically says that the church's actions will fulfill the legal requirements for being tax-exempt. Churches include all the characteristics of a non-profit. But not all non-profits have the characteristics of churches. Because of this, there is normally also a mention that this corporation is created for religious purposes and religious purposes only. This cements the legality that this corporation falls within the realm of church in the eyes of the government.
Once the state recognizes those papers, the church is officially a recognized corporation. There are no papers that need to be filed with the federal government or the IRS, just a simple form sent to the state government. If you are looking for actual articles of incorporation for examples, many states currently have the articles of incorporation for their state online. Alaska for instance. Just search for Church and read the look for recent ones as those will best match current practices for filing.
Other non-profit organizations need to file separately to petition for tax-exempt status. Churches automatically become tax exempt. Churches also do not need to file the yearly 990 most non-profits must file.
There are several reasons why incorporation can be helpful for a church. First, incorporation is often required by denominations for individual churches as soon as possible.
For independent churches, however, there are still a wide variety of incentives. First, it provides a legal liability shield. Lawsuits are running rampant right now, even with churches, and if the church is sued, all the assets of the church can be lost. But if the church is not incorporated, then not only can the church's assets be lost (because there is no church to hold assets) but individual's assets can also be taken.
Incorporating allows the corporation to hold property and assets without it being in any single person's name. This is an ethical protection as well as a way of smoothing transitions from one pastor to another. There is no transfer of property or accounts to deal with because they are all in the corporation's name. Corporations can easily continue past one person's downfall. If the person who hold title to the church's property gets in debt, the church can be seized, but not it the deed is held by the corporation, then it is separate from individual member's properties.
While churches are legally tax-exempt whether they are incorporated or not, having the church incorporated provides evidence of status should there being any question as to the legitimacy of the church's operations. This is unlikely to come into legal question, however.
Being incorporated also eases tax issues. A corporation can get an employee identification number, smoothing the way for a pastor's taxes. This also gives weight to parishioners, should they be audited for their contributions to the church. A church itself is only allowed to be audited when there is reasonable belief that the church is not operating as a church or that something is wrong.
Finally, the church being incorporated allows for people's contributions to be tax-deductible. Otherwise, tithes are technically “gifts” and can be called into question as being tax-deductible. The church will still be tax-exempt unincorporated, but the gifts might not be.
Why Not to Incorporate
By filing for papers of incorporation with the government, the local church is in effect seeking validation from the government. Once incorporated, the government in effect holds the power to enforce the articles of incorporation. Even though the church defines it's own articles, it places the state in a position to govern them. To many Christians, this presents a problem because the Church should not be subservient to the state in any way.
This argument is undermined to some extent because one of the best ways to control is through gifts, and almost all churches accept the special tax-exempt status that the government provides churches, as well as the Housing Allowance that the government gives to pastors. By accepting these gifts from the government we are already putting ourselves in debt to the state, as evidenced by how most churches do not talk politics to avoid losing their tax exempt status.
The primary worry is that by incorporating, a church is allowing the government a foothold to control it, undermining God's role as leader of the Church. When churches are incorporated it can also bring into the church a lot of business thinking and language that does not belong in the church.
The Bible is clear about the church's allegiance being to God alone. It is also clear about making sure that what we give and what we do is because we do it from love, not to get a reward. To many believers, this makes incorporating a church something they cannot do in good conscience.
Here are some sites that deal with this view in more depth: