The issue of corporations and who acts for whom can become very confusing when applied to churches. Is a church minister acting on behalf of Jesus Christ? Or is he acting on behalf of a Michigan Corporation (or some other state) created and regulated by the State of Michigan? When a church is incorporated, all of the acts done in the name of the corporation or with corporate funds or property are presumed by law to be acts of the corporation - unless the church members are acting contrary to the corporation's bylaws or government laws. Furthermore, are church members responsible to those laws or to the Bible? What happens when they conflict? Who decides what is the right course of action, the church or the state? We will go into more detail later, but in a few words, the state creates the corporation, so the state is the ultimate arbiter of any decisions or judgments that must be made.
As an example, suppose the pastor of a corporate church gives a member marriage counsel from the Bible, but the member's spouse does not like it and hires an attorney to sue the pastor. The attorney might cite a state law that requires corporations to employ only state-approved counselors. While courts once were slow to enforce corporate laws upon church corporations, they have always had the right to do so and the practice is becoming more common all of the time. The suing spouse might well prevail in the lawsuit against both the corporation and the pastor because the pastor "failed" to follow corporate law and hire a state-approved counselor.
English law recognized special rights for "ecclesiastical corporations" as compared to "lay corporations", but in the United States, all corporations are considered "lay corporations" (see Black's Law Dictionary, article Corporation). The reason is that American colonists wanted to get away from "state churches" and virtually no churches were incorporated in the 1700s and 1800s. They were recognized as responsible directly to God - a higher status than the English, state-chartered, ecclesiastical corporation.
IRS tax-exempt status is something completely separate from a corporation. It is possible to obtain either one of these, both of them or neither. The Internal Revenue Service (IRS) allows corporations, associations, trusts, and other entities to apply for "tax-exempt" status by filling out IRS form 1023, regulated by the Internal Revenue Code section 501(c)3. Hence, the term 501(c)3-organization is often used. Individuals are not eligible for 501(c)3 status. If 501(c)3 status were available in the first century, Christ could receive it only by forming some kind of state-recognized group. To let our imagination run wild a moment, suppose that Christ decided to do what some churches do today and create the most minimal organization that the state would accept for a 501(c)3: an Association with himself as president and maybe Judas as the secretary-treasurer. Then, when Christ died, Judas might not have decided to kill himself, realizing that the Association Bylaws now made him president. He would need to choose a new secretary-treasurer - perhaps a charismatic and wealthy man like Simon the sorcerer (Acts 8:9 - 10, 18). (I hope this sounds ridiculous to you, but a similar scene is played out in many church associations and corporations throughout the world - they continue on, but with a completely different character than that of the one who founded them.)
Back to 501(c)3 status, there are a number of often-repeated "economic benefits" to obtaining it: federal and state income taxes are eliminated, tax deductibility of members' contributions is less likely to be challenged, various Federal taxes and fees are reduced, and many states will grant a sales tax exemption to 501(c)3 groups. There are also a number of major problems created by 501(c) 3 status - which are not often-repeated.
It was while I was in the process of filling out form 1023 and applying for 501(c)3 status that I personally discovered some of those problems and realized how significant they were. I could not find much information summarizing both sides at the time, so I made the time to read and learn about it myself. But I remember the feeling I had at the time, "Can't I just leave the physical and legal part of our ministry to professionals who will work with government and business? Will not I still have complete control over the spiritual part?" Nevertheless, I found that the IRS insisted on a statement in the corporate certificate saying:
" . . .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 of 1954 (or corresponding provision of any future United States Internal Revenue Law) . . ."
Not only would completing my application for a 501(c)3 require me to promise to obey the current complex IRS code which I did not understand, it would be a promise to obey all future IRS code sections, which I cannot possibly predict. Furthermore, the required dissolution clause says that remaining assets must be given to another 501(c)3 organization. At the time, I did not know how to transfer assets out, so I thought that once something was acquired by a 501(c)3 organization, that it would have to remain under IRS control forever. This was further complicated by the IRS's request that copyrights to my writings be held in the name of the corporation, not in my personal name. It became clear that I could easily lose control of my writings, mailing lists, etc. - as I have seen happen to other groups.
Incorporating can cause "big problems": I have copies of many of the legal documents of a court case that began in the late 70's where the Attorney General of a state took over a church and placed their own receiver in charge of all that church's money. Some time after this action it was found that much of the information in the complaint used to install the receiver was later found to be false. But all it took for the Attorney General to obtain a court order placing all assets of the church corporation under his control was the testimony of former members of the church who claimed that this church was not following its corporate bylaws and that money was being spent inappropriately. While the receiver was in charge, he paid the bills that he wanted to pay - including those of attorneys and advisers whom he hired at nearly $200 per hour. Evangelism, legal defense of the church and other activities he considered non-essential were not funded.
The church tried to strike a compromise to avoid a long legal fight. The church was a registered non-profit corporation and the state's corporation code gave the Attorney General the right to investigate and "institute proceedings" against non-profit corporations that strayed from their bylaws. The receivership ended only when the state's legislature passed a bill limiting investigations of church corporations. The Attorney General never paid back the millions of church money that they wasted.
I hope this got your attention. Laws protecting church corporations could be repealed by the legislature at any time. There is nothing stopping most state attorney generals from taking control of any church corporation about which they have received a complaint.
This is not the only case where this has happened. Notice this Florida judge's opinion when an incorporated church tried to challenge the jurisdiction of the court:
Appellants [the church] appeal on the basis that the circuit court had no authority over them because they are a recognized religious organization, a church. On first reflection they appeared to be correct but upon a closer study of the complaint and the judgment we [the court] are of the opinion that this is not an improper interference by the government into a church, or ecclesiastical, matter. When the members of the church decided to incorporate their body under the laws of the state of Florida they submitted themselves to the jurisdiction of the state courts in all matters of a corporate nature, such as accounting for funds (Matthews v. Adams, 520 So. 2d 334) (1988).
In 1991, the Texas Attorney General began investigating Word of Faith Ministries, a Texas nonprofit corporation, based upon information from ABC's TV program Prime Time Live. The Attorney General was defeated in court only because he did not have any substantive complaints or evidence - the judge of the case agreed that he had authority to investigate non-profit corporations. Later, the Attorney General started another investigation based upon the Texas Corporations Act. He was unsuccessful this time because the Word of Faith Ministries corporations had wisely been dissolved, and the group began legally operating simply as a free church.
There are more cases, but it is probably better to answer a few basic questions first. Please realize that this section is written for the U.S.A. Readers in other countries will need to investigate their own country's laws. Nearly all countries have corporations - some recognize free churches, some do not. (For example, Canada has a specific Religious Organization Lands Act that applies only to free churches.). Below are the five common questions.
Five common questions regarding church incorporation
"Our congregation never plans to do anything that would upset the government, so why might incorporation cause trouble for us?"
A reading of the New Testament will show that the preaching of the true Gospel did upset the government - both Jewish and Roman - on many occasions. We also see that Paul used his legal status to avoid punishment (Acts 22:25). We have also seen federal and state governments pass or attempt to pass legislation that would prevent non-profit corporations from firing employees because they are practicing homosexuals, because they have had abortions, committed adultery, etc. Churches have a duty to officially support their members in doctrinal matters that sometimes involve the state.
Such matters might include: supporting the rights of the pre-born, home schooling, refusing unjust military service, refusing vaccines, loving corporal punishment of children, scheduled absences from work or public school to attend church events, prisoner's religious rights, teaching against interracial marriage, barring a contentious member from services, etc. This paper is not trying to determine your doctrine; churches should teach the doctrines God reveals through His Spirit and Scriptures. This paper is trying to tell you that your doctrines should not simply be determined by the state.
However, when the state considers an issue to be a "political issue", then they consider their rules to take precedence over any church corporation's "doctrine". Government intrusion into non-profit corporations, including churches, has been steadily increasing. Churches have been penalized for speaking out on political issues.
Hitting closer to your wallet, incorporated churches are becoming more frequently viewed as a place for lawyers and governments to pick up money: "But both the IRS and lawyers are looking at churches and seeing a gold mine because of their careless lack of compliance to rules and regulations" (Rex Frieze, former chief business and financial officer for the First Baptist Church, Orlando, Florida, now a tax law specialist and church management consultant - for the full article, see www.wtp.net/MSBF/irs.htm). Congregations whose plan is to avoid controversy with the government need to realize that the government and lawyers may not be planning to avoid controversy with them.
"If it is a mistake for churches to incorporate and obtain tax-exempt status, then why do nearly all lawyers recommend that churches do?"
The simplest answer is probably that incorporation of churches is all that has been taught in law schools and seminaries for decades. This is compounded by the overall trend of nearly all education which teaches that people should be represented by a lawyer, rather than the constitutional right for which our forefathers fought: to represent themselves. Lawyers make lots of money doing corporate paperwork for churches, then suing them and/or defending them in court. Corporations, by law, must be represented by licensed attorneys. A free church can be represented by any authorized representative. Furthermore, courts do not have jurisdiction over free churches, whereas they automatically have jurisdiction over corporations. A free church may never spend a dime on lawyers, whereas an incorporated church may spend thousands or even millions (especially if it has a court battle). As the mass of legislation affecting church corporations grows ever larger (many congressmen are lawyers), church corporations must either retain expensive extensive legal services to comply with them, or run the risk of expensive lawsuits or government investigations. Either way, the churches lose and the lawyers win.
Why can't we form a tax-exempt non-profit corporation now, and then just dissolve it if a major issue comes up where it clearly prevents us from following Christ?"
This is a very good question, but unfortunately, it has very bad answers. Once a corporation is sued or under investigation, laws governing corporations prevent its dissolution and sometimes the transferring out of assets. Some laws prevent resignation of directors and officers in these cases. A 501(c)3 organization has particular trouble. The corporate papers of all such organizations must include the language right out of IRC 501(c)3 where the corporation promises to abide by all IRS rules both past and future. There are already a number of restrictions on what 501(c)3 churches can do and every such church has already agreed to abide by all of the new ones that will be coming. When the IRS investigates a church and decides to remove its tax-exempt status, they usually revoke it retroactive to some date in the past - making the organization responsible for years of back taxes that they may not have money to pay. If the organization is dissolved or goes bankrupt, it must pass all of its assets on to another 501(c)3 organization. This includes physical assets as well as intellectual property such as copyrights and mailing lists. A church may have to "start over from scratch". There is no doubt that any church that loses its tax-exempt status would have been better off to have never applied to begin with.
How can a church function if it is not a tax-exempt corporation or association?"
As already mentioned on page 29, it can function as a church - the way most churches functioned for the first 150 years of the USA's existence. Thousands of churches have never been incorporated and as of this writing, hundreds of others are in the process of terminating their corporations and 501(c)3 status. This is not an illegal action, antigovernment radicalism, tax protesting or anything of that nature. It is simply relying on the Constitution of the USA, existing national and state laws, and long-established legal precedent. Some common practices, such as owning property and avoiding certain taxes may work differently and may vary from state to state. Churches that function this way will certainly meet people - even government and business officials - that are unfamiliar with free churches. The reason is that the old churches that have never been incorporated over the last 50 to 200 years have worked out all of their operational methods (whether they are legal, biblical or not) so long ago that virtually nobody questions them any more. The new churches that are terminating their corporations and 501(c)3 status are few enough that they have not yet made a major impact on business and government - but that is changing.
If a church can form without any government scrutiny, what will stop criminals and tax cheats from claiming to be churches and avoiding prosecution?"
First of all, realize that people in churches of any kind are not immune from prosecution for crimes. If a minister standing in a building owned by a free church throws a rock out the window and injures a passerby on a public road, the County Sheriff can come onto that church property, charge the minister with a crime and arrest him. Similarly, if a taxing entity believes a person is violating tax laws by pretending to be a church when they are not, they can accuse them of the relevant crime, take them to court, and let a jury decide whether or not they are really a church. The government does not have the right to set up rules determining what is and is not a church any more than it has a right to set up rules determining who is guilty of a crime.
For example, the FBI cannot decide: if a package of drugs is found in a car, then the car owner is guilty of drug possession and is sentenced to five years in jail. This would cause innocent people to go to jail when someone else plants drugs in their car. The police must charge the person with a crime. The accused does not have to answer a set of bureaucratic questions to prove their innocence, but may present to a jury any applicable witnesses and evidence that may be available to them. Similarly, individuals claiming to be a church should not have to prove the church's right to exist by answering a set of IRS bureaucratic questions, but prove the existence of their church by whatever evidence it has of its functioning, and then let a jury weigh the evidence. Juries are not perfect, but they tend to do much better than government agencies.
When planning to start a local congregation, the legal status used will make a big difference in what the congregation can do and how it will operate. While the future is not completely predictable, very few of the people who help start churches have much knowledge at all about the history of church incorporation, why it was not done in the past and how it affects churches today. The table on the following pages should answer most of the questions about these issues. Some effort was made to document sources of this information, but this paper only scratches the surface of what is available.