Page 53 | Church Law & Tax (2024)

Before volunteer work begins, take steps to reduce the risk of injury:

Make sure the project is conducive to volunteer labor. Large or complex construction or demolition jobs are best left to professionals.

Keep in mind that working on roofs, ladders, or scaffolding is inherently dangerous. Be sure to instruct volunteers on safe work procedures and the safe use of all equipment.

Designate a project leader who understands the importance of safety and who will be alert to unsafe behavior that could result in injury.

Enlist only volunteers who are skilled and physically capable of undertaking the work assignment required of them.

Volunteers May Not Qualify for Workers’ Compensation

Although the law varies from state to state, in most states, volunteers will not be covered under workers’ compensation statutes. So if a volunteer were injured while working for your church, medical coverage may be available only under your church’s general liability “premises medical payments” policy. Check with your insurance agent to determine the extent of your coverage and the circ*mstances under which it may cover volunteer injuries.

If your church undertakes a large project, consult your attorney to make sure all potential liability exposures have been addressed. You may wish to consider having volunteers and independent contractors sign a “hold harmless” agreement to protect the church against liability claims resulting from the project.

This article originally appeared on BrotherhoodMutual.com. Used with permission.

Data is one of the most valuable assets a church has, but trying to figure out what it’s worth so we can adequately protect it is challenging. Protecting data isn’t difficult, but the task must be approached as deliberately as the fire and security protection we apply to our church buildings.

The first step is to recognize that your church has different kinds of data, and classifying data helps set a value to strategically protect it. While some data is mission-critical, other data is merely convenient. The difference is often found in answering the question, “What would happen to our church and our ministries if this data was made public or was destroyed?”

Data that might be considered mission critical includes:

Databases. Databases contain names and contact information, and sometimes include contribution, attendance, baptism, and other data that help us serve our congregations. Unfortunately, most churches have more than one database. In addition to lost efficiencies and synergies, multiple databases add complexity to the task of data protection. Church databases can include true databases, spreadsheets, document files, contact lists, and, of course, the Rolodex™.

Sermons and Lesson Preparation. Sermons and lessons and the research behind them.

Communications. Letters and e-mail between the organization and others—both internal and external.

Graphic Files. Photos, videos, bulletins, programs, promotional posters, and audio files.

Governmental Documents. Church meeting minutes, agendas, meeting notices, etc.

Custom Programming. Templates or any other items that have been customized to help communicate and serve with uniqueness.

Data Threats

Threats to data security can be classified as either internal or external.

Internal. Good employees sometimes become disgruntled employees. Hardware sometimes crashes. Vendors sometimes develop sticky fingers. We are constantly being attacked with malicious software (called “malware”) in the form of spyware and Trojan horses.

External. Burglars, external catastrophes like hurricanes and earthquakes, and those who try to hack into systems that are connected to the Internet. As we monitor our clients’ network security, we see almost constant evidence of Internet programs (called “bots”) trying to exploit operating system vulnerabilities. Their goal is to grab data or computer resources to serve the interests of others.

Prioritizing Data Protection

Some data, if lost, would cause no real damage. But other data losses could really hurt. Consider, for instance, if your membership database was no longer available, or if members’ private information was made public. This is a critical situation for churches and ministries that process online or ACH contributions and keep donors’ financial account information in the database. In the wrong hands, that information could allow others access to donors’ accounts!

Therefore, losing the database would have the greatest impact on your church and its membership, so protecting the database should be the highest priority. This protection can take multiple forms.

• Reduce the number of databases as much as possible. The ideal number is one database. This ensures that a high-priority focus on protecting it will be as effective as possible. It also has the benefits of saving staff time (updating a record once takes less time than updating it multiple times in every database) and increasing staff synergies. The downside is that some ministry areas may have to change the way they maintain their data to accomplish this goal.
• Perform multiple daily backups, easily done with many of today’s database engines. Some choose to have their database backed up every two hours, for example, so that if there were a problem, less work would have to be re-entered.
• Send a copy of database backups to an off-site server. If there were a regional catastrophe (like a hurricane) in which staff evacuated in many directions, the database could be securely accessed via the Internet.

Jason Powell, information technology director at Granger Community Church in Granger, Indiana, says, “Our database is the center of what is done on our network. If it were lost, the cost to reconstruct it would be huge; worth it, but huge.” Spending a little to protect it in advance is good stewardship.

The second priority is to safeguard data files that are foundational to the ministry. These include communications with governmental authorities as well as the church’s own governmental records (agendas, minutes, meeting notices, etc). Records of this type may become critical in re-establishing a church or ministry following a catastrophe.

The third priority is to preserve letters and e-mail communications that cannot be easily re-created.

Few things tangibly say who you are like familiar graphics, and this type of data is the fourth priority. Whether it includes bulletins and programs, promotional formats, or photo, video, or audio files, these are often irreplaceable pieces of church history that help many feel a little more comfortable in a crisis. They communicate who you are, and should be protected. Because of their size, however, these types of files are often eliminated from daily backup routines.

The fifth protection priority is custom software programming, usually in the form of templates and database modifications.

Layers of Protection

Data is usually best protected by applying layers of protection. We recommend the following:

• Server rooms should be locked and accessible only to those with a legitimate need for access.
• Passwords should meet or exceed minimal policy requirements. This means passwords should avoid words, names, dates, etc.—things that are easily guessed. Passwords should never be shared with other staff members. David Brown, information technology director at Capital Christian Center in Sacramento, California, says, “When someone lets us know they shared their password for any reason, we immediately change it for them.” Like many other ministries, Capital Christian Center does not allow users to change their own passwords. This helps ensure that passwords are high quality.
• Some organizations are moving toward the use of biometrics to eliminate passwords altogether. Dell, for instance, will often include fingerprint scanners at no additional cost. These easy-to-use devices increase the protection of networks and sensitive data.
• A fully configured, updated, and tested Internet firewall will keep unwanted intruders (bots and hackers) out of your system.
• A fully configured and updated SPAM filter will minimize the impact of malware contained in e-mail.
• Use of a secure, in-house, instant message system rather than a public system will keep hackers away from security “back doors” that are easy to exploit.
• Back up the entire system daily (Monday through Friday night) on tape, saving backup tapes for a minimum of three weeks.

Regional Disasters

The following additional steps will help protect against data loss if you should experience a local or regional catastrophe:

• One night each week (preferably after the busiest day of the week), take that night’s backup tape off-site. Use two tapes, rotating tapes each week, so that you’ll always have the previous backup available.
• Copy high-priority data to an off-site location on a daily basis via secure Internet connection. Though many vendors offer this service, only a few also have the ability to restore a database backup and securely host it over the Internet as an interim solution following a catastrophe. This is especially important for databases.

Your data, though difficult to objectively value, is one of your most significant assets. Because your ministry is heavily dependent on data, implementing some fairly simple policies and procedures will go a long way towards protecting your ministry.

Consider the following true stories:

A staff minister at a local church was called in and fired, effective immediately. No warning had been extended. No program for work improvement had been designed. At the meeting, no explanation was given for the firing. No grounds of appeal were offered. No severance package was tendered. Later, the minister discovered that vicious, unfounded rumors of personal immorality had been circulating, but he was given no opportunity to respond.

Embezzlement of Sunday collections has emerged as a concern in the U.S. Catholic Church. A survey by Villanova University of 76 dioceses found that 85 percent of them reported cases of embezzlement within the past five years, with 11 percent of those cases involving sums greater than $500,000.

In 2007, the Survivors Network of Those Abused by Priests (SNAP) announced it was challenging the Southern Baptist Convention (SBC) to improve its handling of sex abuse allegations in Baptist congregations. Turning its attention from its home community, the Roman Catholic Church, SNAP urged the SBC executive committee to create an independent review board to deal with sex-abuse accusations. SBC president Frank Page correctly noted that Baptist polity does not permit centralized oversight of local churches, but he acknowledged the need for churches to conduct background checks and to tighten recommendation procedures for job candidates.

Anyone who works in a large secular company is given a personnel policy manual as thick as the Manhattan phone book. These manuals almost always contain detailed policies for dealing with issues related to personnel, financial management, and sexual harassment and abuse. The companies would never think of “winging it” when it comes to such serious issues. Instead, they put into place policies and procedures that apply standards of justice, good stewardship, transparency, oversight, and due process. They do not always get it right. But at least they are making the effort.

As the examples above show, churches and Christian organizations often demonstrate an appalling weakness in this area. They often have no policy for dealing with staff performance issues, for handling terminations, for appeals processes. They trust pastors and other leaders with money and little oversight. They improvise their responses to sexual impropriety and abuse on a case-by-case basis. Indeed, when New Life Church implemented a planned response to Pastor Ted Haggard’s now infamous relationship with a male prostitute, it showed the importance of being prepared. But New Life Church is the exception that proves the rule.

It is not clear why we so often choose to wing it. But here are some possible reasons. Many churches are very small, almost mom-and-pop operations. They have never felt the need for a personnel manual, a sex-abuse allegation procedure, or a financial-oversight plan.

Some organizations also have an internal culture of authoritarianism. The pastor or leader is “God’s man” for the job, and members are called to submit and obey. No one is allowed to check on whether the shepherd has really become a wolf. The ethos of trusting informality that so often characterizes churches is another factor. Who can be against trust? Sadly, it looks like Ronald Reagan’s dictum of “trust but verify” is the better approach. Human nature is what it is. We are not yet fully redeemed, not even in the church (imagine that!). The open doors and open hearts of the church also leave us wide open to sharks, predators, and temptation. It may seem counterintuitive, but creating policies to encourage just treatment can actually build trust. When such policies require financial transparency and limit one-on-one pastoral contact to visible spaces, they speak of our willingness to be open about our activities. And that willingness feeds trust.

Finally, we have an underdeveloped approach to justice. We too often wait for something to go wrong before we try to fix it. Thus, we tend to equate justice with punishment. But a better understanding of justice sees the importance of prevention: establishing a context in which right relationships and fairness can grow, be maintained, and be restored among sinful people—especially those sinners who are attempting to live for Jesus Christ. Love, trust, and good will are not enough.

So bring on those policy manuals, and the commitment to justice that goes with them.

The difference between the two types of cash flow is critical to the Internal Revenue Service. The IRS has been paying closer attention to the business operations of tax-exempt organizations to determine whether each activity is an extension of the mission of the organization or a freestanding business with income that should be taxed.

The IRS allows nonrelated business income. But income—as distinct from donations—is taxable if it stems from an activity not “substantially related” to the organization’s activities and income. What does that mean? According to IRS regulations, “substantially related” means the trade or business must “contribute importantly to the accomplishment of the exempt purpose of an organization.”

The IRS applies three standards when considering whether the activities of tax-exempt organizations are taxable. Income is presumed to be exempt from taxes unless the activity

• is not substantially related to the organization’s exempt purpose or function,
• is a trade or business, and/or
• is regularly carried on.

In addition, the income must amount to at least $1,000 in a fiscal year. An exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T. See Unrelated Business Income Tax Returns and the Form 990-T instructions for more information about return filing at www.irs.gov.

So how should churches proceed? Here are some examples worth considering:

• Bookstore ministry. To provide members with helpful books and study guides, church members open a small bookstore inside the facility. The bookstore is open on Sundays and a few hours during the week while church activities take place. Even though materials are sold at a profit, the income is not taxable because the activity supports the church’s educational mission and operates primarily for the convenience of its members.
• Bookstore business. A church bookstore becomes so popular that it begins to stock a variety of books, cards, and gifts and establishes regular hours for the public. It also moves to a location within the building that has an outside entrance. It’s a stretch to say that the church’s mission includes providing a retail outlet for Christian books and gifts. Reasonable observers will deem this a business.
• Newsletter with ads. A church publishes a regular newspaper that is sent to people’s homes as an evangelistic tool. To pay for printing and mailing costs, the church sells advertising. Eventually it realizes a profit from ad sales. The newspaper may be part of the church’s evangelistic mission, but sponsorship income, or ad sales, could be taxed. The local newspaper, which competes for the same advertising dollars and pays taxes on that income, may complain.
• No-go parking lot. A downtown church has an empty parking lot during the week, while nearby parking garages are full. A business-minded trustee sees an idle asset—parking spaces that could be leased on a monthly basis. What’s more, this income is passive—no one has to work to obtain it. The income is taxable because the church’s mission does not include leasing space.

Steps to Help Avoid an Audit

To help avoid an IRS audit, church leaders need to take four steps:

Clarify your mission. A mission statement answers the question “What kind of business are you in?” It provides a reference for board and staff members to decide whether a particular activity or ministry is consistent with the church’s mission.

Separate ministry from business. While there is no definitive rule about when a church should consider separately incorporating a ministry that becomes a business unit, many churches find that an activity becomes a business when its liability risk becomes significant, and/or when the church board discovers that this operation is gobbling up the time of staff members. If a nonministry operation contributes 50 percent to 80 percent of the church’s income, it could raise red flags for the IRS. Note: It’s possible to form a subsidiary corporation that puts its profits back into the business and into the church.

Take care in property use. Churches are most vulnerable on this point. Be very careful when considering rental income to help finance a construction project. Make sure building plans move ahead without undue delay. If your church receives land as a gift, liquidate it unless a ministry, like a church camp, will be developed on the property within ten years.

Retain a skilled attorney. “Any larger church must have someone acting as general counsel who is familiar with the activities of the church,” says attorney Chip Watkins. If a church plans to undertake a nontraditional revenue-producing activity, church leaders should first come to grips with the business vs. ministry issue. “There often is a way to structure the church’s activity for exempt purposes without generating income as a trade or business,” Watkins says. After all, it’s wiser for churches to focus on the business of making disciples rather than making a profit.

When we arrived, we left our kids in the preschool room with a dozen other children and two adults. After the event, we returned to pick up our sons. The caregivers were chatting with each other while my friend’s child busied himself with toy trucks. I didn’t see my child. Not yet concerned, I checked around the room, but he wasn’t there.

When it became clear the caregivers had no idea when he left or with whom he’d left, my anger was second only to my terror. Imagining my three-year-old abducted, or wandering into traffic, I began to panic. Fortunately, he was found roaming the hallways. But the damage had been done; I never set foot in that church again.

Whenever churches open their doors to the public they expose themselves to both opportunity and risk. A well-run event maximizes the opportunity and takes precautions against the risk.

Communication is key

How do churches ensure the success of their promotional endeavors and protect themselves from liability? Tracy Baer, Event Manager for Christ Community Church (CCC) in South Elgin, Illinois and Don Corbisello, Business Administrator for Christian Life Center (CLC) in Bensalem, Pennsylvania shared their insights.

Tracy has managed many large-scale events including one featuring a 13-foot-tall cucumber named Larry—that’s right, Larry the Cucumber of Veggie Tales fame. Others have included hosting contemporary Christian artists such as Superchick, Salvador, and the 33 Miles/Avalon concert. Tracy’s church regularly hosts a comedy club, which has been a sold-out event for three years at all three Christ Community Church campuses.

Don’s church has hosted the well-known Women of Faith conference, and authors/ speakers Gary Smalley and Tim LaHaye among others. The church is also used for local events such as high school graduations or performances by the Delaware Valley Philharmonic. In addition, a local television forum is broadcast from their location.

Bench-style seating accommodates up to 1800 people in the auditorium at CLC. Smaller events may be held in the gym, foyer, coffee shop, or classrooms. The church is equipped with a full-service kitchen and prepares food on-site.

Christ Community Church is a 160,000 square foot facility with room for 1900+ in the worship center. Theater-style seating including balconies make this an ideal place for large events. The gym serves smaller crowds of up to 800, or converts to a banquet hall for 500. In addition, the chapel seats 400.

Though the churches are similar in size, their approaches to event management differ. Christian Life Center relies on their website, paper forms, and verbal communication. Christ Community Church employs a computer network with event management software for in-house planning as well as using their website to publicize events. Both agree on the bottom-line to a successful event: communication.

Choose events that advance ministry purposes

Hosting events is one way churches reach out to their community. But not all events are worth sponsoring. Approval should be based on the purpose of the event. Any events you sponsor should adhere to the values of your church and advance your ministry purposes.

At CCC, sponsoring ministries must evaluate the experience in terms of how it meets the core values of Belonging, Growing, Reaching, and Serving. If an event passes this test, an “Event Approval Form” is submitted for review and approval by three parties: the team captain, administration director, and finally, the executive pastor. The approval form begins the planning process by asking the questions: what is the target demographic (school-aged kids, college, 30s)? What is the potential attendance? How will you promote the event? How will you measure a win? Will you use volunteers? What is your estimated budget? What is your estimated income? Which ministries will you call upon for assistance? It’s preferred that this form be completed and submitted 18-24 months, but no later than 6 months, prior to the occasion.

At CLC, a “General Request Form” is submitted three weeks prior to the proposed event. The Logistics Committee evaluates the request in terms of how the event promotes the Kingdom of God or growth within the church. Don points out that just because an event is labeled “Christian” does not mean it receives automatic approval. For example: Christian Life Center turned down the request from a Christian wrestling association not because there is anything particularly wrong with wrestling, but because they saw no connection to furthering the kingdom or growing in Christ.

This policy becomes the deciding factor should there be conflict in scheduling. Though it’s rare for two events to compete for the same space, if it happens, the event that most closely aligns with the mission of the church is chosen.

Determine the Needs

The “General Request Form” used at CLC is a four-page document that also addresses facility and equipment approval, provides space to diagram the room layout, and includes sections for requesting vehicles, finances, food service, and childcare. It’s a one-step process. The custodial staff is assigned the task of making equipment available, while it is the responsibility of the sponsoring ministry to set up and clean up the rooms used.

At CCC, once an event is approved, it is entered into Event Management Software (EMS). EMS is populated with inventory, room availability, memory-jogger questions, and checklists to assist in the planning process. As decisions are made, the information is entered into the software and available to all involved. Tracy has also created an Event Planning Guide that is available through a wiki on-line document system accessible by staff members from any computer in the network. This handy reference keeps everyone up to speed on the process of planning.

Events are a team effort at Christ Community Church. Planning meetings include the event manager, facilities manager, and representatives from all involved ministries such as Creative Arts, Sound, Technical Support, and Communications.

Once approval has been granted and needs identified, it’s time to talk with the featured talent.

Negotiate the details upfront

Three months before the event, Tracy expects to receive a contract for negotiation. The negotiation stage is the time to nail down every possible aspect of the event—liability, payment, cancellation fees, volunteer needs, resource needs, catering needs, bus stock, sound and tech support, merchandise proceeds, additional traveling sponsors with the group, stage requirements, and so on. The largest contract rider Tracy has dealt with was 37 pages long. “Everything has to be nailed down in writing before a contract is signed, all the way down to who is expected to clean up,” says Tracy.

Managing publicity and ticket sales

Both churches have in-house graphic design capabilities for the production of advertising materials such as posters or flyers as well as tickets. In addition, both churches promote events through the church websites, bulletins, and announcements.

Registration and ticketing are handled in a variety of ways. At CLC, interested patrons may phone in registration, register on the church’s website, or sign-up on site. Tickets are available at the church following services.

Depending on the size of the event, CCC may use their internal database for registration, or for larger crowds, the second option is external ticketing software by ServiceU – TicketU. This method allows for sales of tickets online or through the on-site box office.

Communicate to Avoid Problems

According to Tracy, “one of the biggest challenges with this many people is making them feel welcome while maintaining a level of security.”

Christ Community Church staff and volunteers are organized into teams, each with a particular area of responsibility.

The First Impression Team’s goal is to make visitors feel welcome. It begins in the parking lot. CCC has a quarter mile driveway and approximately five acres of parking lot. Traffic Team members, in bright orange coats, wave flashlights to direct drivers to designated parking. Use of cones, signage with arrows, portable lighting, and friendly, smiling parking attendants helps visitors find their way and reduces anxiety.

Once inside, greeters welcome guests, have them sign-in and procure nametags before handing them off to ushers, who help them find their way to the auditorium and seating. Signing in and out and wearing nametags is standard security protocol at CCC. In the event of an evacuation or shut-in, they need to be able to account for all persons in the building.

During the event, the Security Team ensures safety by prohibiting admittance to those without tickets, and by patrolling the interior to encourage guests to stay in designated areas. Once the event is underway, Traffic and Security Teams monitor the parking lot for suspicious activities. The Security Team consists of off-duty and retired police officers, and they are ready to serve as liaison with the police department, should any interaction with them become necessary.

The safety of guests is a responsibility CCC takes seriously. The Medical Response Team is on-hand to attend to any medical emergency and to act as point person with the local fire and rescue department. As an added measure of protection, each staff member, medical or security personnel as well as ushers and greeters are assigned a number from the paging system. This number is flashed on a screen near the stage if management needs to alert them of an emergency.

Additional Maintenance Team members are on hand to monitor restrooms for trash, cleanliness and supplies, and dispose of trash accumulation in the auditorium and hallways.

At the end of the event, guests are bid a warm good-bye and pass once again into the care of Traffic and Security team members as they exit the grounds.

At Christian Life Center visitors are no less valued than those at CCC, but logistics differ based in large part on the differences in their facilities. CLC is surrounded by parking, and guests are always within 40 yards of an entrance. This close proximity to the building eliminates the need for parking attendants.

It is the responsibility of the sponsoring ministry to recruit volunteers to greet and usher guests.

During events, custodial staff does double-duty as security. In addition to maintaining a healthy environment, custodians walk throughout the building to redirect people who have wandered from the event and monitor the parking areas. In case of emergency, 9-1-1 is notified and police and/or fire and rescue personnel intervene.

When small churches host large events

What lessons can smaller churches glean from the procedures used by large congregations like CCC and CLC? How does a small church manage activities that involve welcoming the larger community to their facility?

When Fellowship Church of Carol Stream hosted a Bible Quiz Meet that included teams from nine Midwestern churches, Anita McFarlane worked with a team of volunteers to insure that the event went off without a hitch.

Before the actually planning began, Anita telephoned the church office and proposed several possible dates for the event. The event required physical space throughout the church, so she also contacted various ministry leaders to ask permission to use those rooms. With the date and space established, it was time to plan.

Announcements ran in Sunday bulletins asking for volunteers-volunteers to provide and/ or prepare food, volunteers for set-up/tear-down, and volunteers to house quizzers and coaches.

Registration was handled by e-mail. Each church was responsible for providing a list of registered quizzers and coaches and details about those needing to be housed.

Once a headcount was established, a volunteer set the lunch menu and provided sign-up sheets with specific food items needed.

A small fee was charged to pay for awards and (hopefully) cover the cost of any food that might be purchased if donations fell short. For the small church, volunteer help and donations are critical to the success of an event.

The smaller the church, the greater the risk?

According to Anita, the biggest risks in hosting a large group event at church are in the area of food and housing. Volunteers were cautioned to use food safety precautions, such as hand washing, to avoid unsanitary conditions when preparing and serving lunch. They were careful not to leave food out for an extended period of time.

If families volunteer to open their home to host an event or house a visiting guest, they assume the liability for this. In this case, it’s a good idea to know what your homeowner’s insurance policy coverage includes.

The problem with small churches hosting events is that they may forego some of the steps that larger churches take, such as having signed contracts that relate to the event, a security team to monitor people and property, and a medical team that’s on-site and ready to go in an emergency.

No matter the size of the church, Tracy, Don, and Anita agree-communication is the key to successful event management. If you think you’ve asked someone to do something, ask again. If you think you’ve told someone a particular date or time, remind them. Be specific in instructions and document decisions. Plan ahead and require accountability along the way.

What steps can leaders of religious services or community meetings take if there is an outbreak of flu in my community?

To the extent possible, make decisions in accordance with your state and local health departments about community gatherings and religious services during widespread flu illness in your community. People should not be discouraged from gathering unless advised by public health officials.

Encourage people to wash hands often with soap and water. If soap and water are not available, use an alcohol-based hand rub. If soap and water are not available and alcohol-based products are not allowed, other hand sanitizers that do not contain alcohol may be useful.

Remind people to cover their mouth and nose with a tissue when coughing or sneezing. It may prevent those around them from getting sick.

Reduce crowding as much as possible. People gathering in close proximity may increase the risk of flu transmission.

Identify which activities may increase the chance of spreading flu. Work with your local health department to make decisions about changing or limiting these activities in order to help keep people healthy.

Many religious services and community meetings involve a time of greeting or recognition by shaking hands or hugging. Encouraging interaction without physical contact and implementing social distancing measures may reduce the spread of flu in your community.

Some religious traditions and rituals emphasize eating and drinking from communal dishes and vessels. Flu transmission may be possible in these circ*mstances. If flu is circulating widely in your community, faith and community leaders may consider adjusting such practices in order to reduce the spread of flu. Check with your local or state health department.

Encourage people with flu-like illness to stay home. The spread of flu may be decreased if people with flu-like illness stay home for at least 24 hours after they are free of fever without the use of fever-reducing medications.

If there is widespread flu illness in your community, discuss the risks of attending gatherings for those at high risk of medical complications from flu. By avoiding gatherings, these individuals may reduce their risk of becoming ill with flu.

Provide alternative options and venues for participation whenever possible for individuals who are ill, home-bound, or have a high risk of flu complications and will not be able to attend gatherings.

This document was produced by the Center for Faith-based and Neighborhood Partnerships at the U.S. Department of Health and Human Services with support from the Centers for Disease Control and Prevention. Used with permission. It is excerpted from the downloadable resource Preparing Your Church for a Pandemic.

Such was the case for hundreds of churches nationwide who agreed to install “cost-free” computer kiosks in their lobbies. Unwittingly, they signed contracts obligating them to pay thousands of dollars in lease fees for these kiosks, many of which didn’t work at all. In April 2009, the Washington Post reported that Washington, D.C. sued five corporations involved in the alleged scam and asked the U.S. Justice Department to investigate.

Scams like these illustrate the importance of doing your homework before entering a vendor relationship, especially a long-term one. You wouldn’t sign a 30-year mortgage without knowing a little bit about the lender. Neither should you sign a vendor contract without asking some pertinent questions about the company’s reputation and expertise.

Do Your Research

If you’re going to be investing considerable time or money in a vendor, you’ll want to do a thorough evaluation to ensure a mutually beneficial relationship. Start by asking colleagues at other churches for their recommendations about a specific product or service. If they “adore” (or despise) their new copy machine, for example, they’ll be glad to share some information with you.

Here are some questions to get your investigation started.

Viability

• Is the vendor financially stable?
• How long has this person or company been in business?
• Will the company be in business 10 years from now?

Experience

• Is this vendor familiar with projects of the same complexity and scope?
• Has this vendor worked with churches of similar size and characteristics?
• What’s this vendors’ reputation for quality? Reputation
• Does this vendor have a strong customer base?
• What do customers say about their experience with the vendor?
• How many customers have left this vendor for a competitor?
• What’s this vendor’s rating and history of complaints with the Better Business Bureau?

Customer Service

• How available is customer service, when you have a question or problem?
• Is the vendor’s customer service staff knowledgeable, helpful, and friendly?

Some of these questions you’ll pose to the vendor; some you’ll want to investigate on your own. Of course, the amount of time you spend on research will vary, depending on the size and complexity of the purchase.

Check References

It’s easy to get excited about a company’s offerings during a sales pitch. But there can be a gap between what sales materials promise and what a company can deliver. To get a better sense of what you’re signing up for, it’s important to talk with flesh-and-blood customers.

This means asking your vendor for a list of references, and then contacting at least two of them.

Official References

Most vendors will give you a list of customers who are likely to give the company a glowing recommendation, but they may be worth calling, nonetheless. Customers may be willing to provide honest opinions on the company’s dependability, customer service, and their overall satisfaction with the vendor.

Unofficial references

It’s also good to find customers for “unofficial” references. You might be able to find other customers by looking on the vendor’s website for examples of past work, or by talking with other churches in your region.

Phony References

Checking references may alert you to a scam. For example, a vendor may direct you to a phony website or a satisfied “customer” who’s actually an accomplice. If a vendor provides just an email address, request a telephone number, too.

Accept only references from companies with a verifiable mailing address and telephone number. Ideally, you’ll speak with a receptionist before talking with the actual reference person. It’s generally not a good idea to accept references from customers who call you.

Use a Cheat Sheet

To make the most of your reference checks, write up a list of questions you’d like to ask each of the customers you call. Be specific. Asking, “How’s their customer service?” will generally yield less useful information than: “How many customer service calls have you placed?” and “How long did it typically take for them to fix a problem?”

Take Your Time

Some salespeople encourage you to sign an agreement quickly, often using a price break or some other incentive that expires if you don’t act by a certain date.

Never feel pressured to buy from a salesman. If you’re not satisfied that you know enough about the vendor to enter a written agreement, ask for time to think about the offer. Don’t sign any sales contract until you have reviewed it, preferably with an attorney, and confirmed that it matches the verbal agreement.

If vendors truly want your business, they’ll work with you to establish a solid, trustworthy relationship between themselves and your church.

Research Yields Results

Careful investigation can give you a great deal of insight into what might happen to your church if you were to enter an agreement with a vendor. By doing your due diligence up front, you can save your church the time, money, and heartache of getting duped by a scam.

Not long ago, a pastor noticed one of his church’s four-wheeled dollies had been loaded with expensive sound equipment and was sitting beside a propped-open door. When he looked out the door, a van abruptly sped away. This happened on a normal weekday, while church employees were in the building.

Criminals would find it just as easy to walk into the average church office on a weekday, hold a weapon to a staffer’s head, and start making demands.

The days of confidently unlocking the church in the morning and leaving it open all day have passed—if they ever truly existed. If you’re planning to remodel, expand, or even build a new church building, it’s time to make some design decisions that can improve the safety of the people around you and protect the assets you steward.

Access Control

Limiting entry to your building is one of the most basic elements of church security, and you have many ways to do it. Your options range from simple deadbolt locks to electronically controlled access systems.

Locks are the most common option. They’re affordable, easy to install, require little maintenance, and are pretty effective at keeping people out. However, users can compromise their effectiveness by hiding keys outside the building or distributing keys without a monitoring system. One costly drawback is that a locksmith must re-key the whole building if a key is misplaced, lost, or stolen.

For best results, your church should limit key distribution. By placing an identifying serial number on each key, you can track who has which one. When someone leaves your organization, make sure that person returns the same key that you gave him or her.

Electronic systems are becoming popular with churches because they provide more flexibility than locks. They’re costlier and more complex to install, but they come with a wide variety of options that can help to justify their expense.

For example, you can program the system to limit admission to certain sections of a building at certain times of the day. You can make some parts of the building, such as the office area, accessible only to people who hold a certain key card or know a special password. In addition, you can cancel a lost or missing key card instantly without rekeying an entire building.

Zone defense

Theft is no longer a crime committed only in the dark of night. Today’s thieves are brazen enough to walk into a church during business hours or during an activity, gather the items they wish to steal, and then calmly make their getaway.

Design your building so that it can be locked in zones to provide secure havens for the staff people inside throughout the week. For example, you can allow visitors access to a lobby area but lock the office suite and remainder of the building. This gives you time to determine a visitor’s intentions before allowing him or her access to other parts of the facility. Another option is to lock the main doors and give your secretary the ability to “buzz” visitors in after screening them using an intercom and video monitor.

You’ll want to protect areas that are highly valued or are susceptible to vandalism. Your school or nursery areas also require enhanced protection. For nurseries, create a check in and check out area that will impair someone from forcibly removing a child from the church or school’s custody.

Finally, consider providing a secure location for counting church offerings. While most cash control measures are procedural, this is another area in which a church’s design can improve security. If a school for criminals existed, one of the primary lessons would be that churches collect money on Sundays and Wednesdays.

Fire Safety

When securing your building, don’t compromise fire safety. Equip exit doors with crash bars instead of deadbolts, so that people can leave the building quickly in an emergency. You may wish to consider crash bars that set off an audible alarm when someone pushes them, so people won’t prop doors open and defeat your security efforts.

Security Alarms and Video Cameras

In today’s climate, experts often recommend a professionally installed, monitored, and maintained security system to protect your buildings. With central station monitoring, your building is under watch 24 hours a day, 365 days a year. When your system senses an emergency, a signal goes directly to the monitoring station. Trained professionals identify the signal—such as a burglary or other emergency—and notify you and the proper authorities.

For an added layer of protection, you can also install video cameras. These are valuable for a number of reasons. Not only do they allow staff to view target areas of the property, but they can also record valuable information that can help law enforcement apprehend and convict criminals. Today’s cameras are small enough to be hidden inside exit lights, so they don’t draw attention to themselves or detract from your church’s appearance.

Make Security Your Cornerstone

Many people treat churches with special respect. However, some criminals intentionally pursue ministries because they perceive them to be easy targets. As a result, churches and related ministries are not exempt from the criminal elements facing any other organization. While you cannot hope to avoid all possible threats, there are many things you can do to minimize them, starting with basic church design. Make security the cornerstone of your building and you can help protect the people in your ministry and the assets in your care.

1. Prior to Merger:

Provide the following to legal counsel.

• An explanation of the motivation for the merge: This will help legal counsel determine the type of transfer to utilize (i.e., merger/donation/asset purchase).
• An articulated final version of the entities post merge: This will help legal counsel anticipate additional issues that may need to be addressed (such as, employment contracts, leases, and so on).
• The following documents:
  • Articles of Incorporation and bylaws
  • IRS determination letter
  • Mortgage and loan documents
  • Property tax exemptions
  • Lease agreements
  • Employment contracts
  • List of restricted gifts
  • List of all assets (real property, computers, books, vehicles—basically a list of everything that the church owns)
  • List of all liabilities (such as copier leases, rental leases, and so on).

2. During the Merger:

3. After the Merger:

These transactions have long been common in the business world, but interest in them has grown rapidly recently within the nonprofit sector. The very phrase “mergers and acquisitions” or the concept of these types of transactions can evoke many different images.

Some may envision a hostile corporate takeover. Others may picture a fluid joining of two distinct bodies of believers and, as a result, becoming one church community. Still others may think of a resource-rich church with declining membership partnering with a vibrant church with few financial resources.

While there are resources to help leaders evaluate the decision whether or not to merge, acquire, or dissolve, there is little guidance as to how to legally effectuate the transaction options available to churches.

Due diligence

Before we begin discussing the options for these transactions in detail, it is important to take a step back and make sure the proper due diligence has been exercised before a church entertains one of these transactions.

The overall goal of due diligence is to make sure that there has been sufficient inquiry and collection of information about the future church partner, surviving church, or dissolving church to enable your church to make an informed decision about what its next step should be. It is important that all parties have reviewed the legal and financial situation of the other church before formally committing to one of these transactions.

Types of information that should be investigated during the due diligence period includes, but is certainly not limited to: governing documents (articles of incorporation, bylaws, amendments of the same); contracts; personnel policies and structure; agreements with vendors and other organizations; real estate records; marketing materials; programs; activities; IRS records; financial statements; audited financial reports; licenses; potential or current litigation issues; details about debts or other liabilities owed; and so on.

The due diligence process requires the churches to work together in gathering and analyzing all the information. So although the due diligence process is incredibly important to the overall success of the transaction, it is also a good indicator of how well the churches will work together throughout the entire transaction.

10 keys to successful transactions

Several principles can make a merger or acquisition successful. Outlined below are 10 important principles, but church leaders should work with their church and legal counsel to develop a list of what would make the merger or acquisition successful.

1. Keep Jesus Christ front and center.

He should be the primary motivation for the merging or acquiring of another church. During the process, remember that everything should be done as unto Christ and to honor His bride, the church. Ephesians 5:22-23 compares the union of husband and wife to that of Christ and the church. The imagery and symbolism of marriage is often applied to Christ and the body of believers known as the church.

Marriage is also a good way to describe the process of two church bodies merging together. It is important to remember to always go into negotiations or discussion with the mindset that the goal is for the new church community to be able to experience Jesus Christ on a deeper level. The goal of the discussions and negotiations should not be to “win” in the process or make the other team “lose”; it should all be done for the glory of God. In doing so, all the participants to the merger or acquisition will be exemplifications of a “win-win” outcome for all concerned and unto the body of Christ.

2. Verify the motivations for the merger or acquisition.

Political pressure within the church, tough economic times, real property issues, and structural issues may not be the best motivations for a merger or acquisition. A positive motivation for a merger or acquisition means it is more likely to succeed.

3. Compare purposes and values.

Make sure the churches have the same values and beliefs. If these core principles are too far apart, then there could be an issue down the road. Understand it’s a marathon, not a short sprint. Be prepared to have some really great times and some tough times throughout the process. Be patient. Let the process, negotiations, and discussions naturally happen.

If the churches try to rush anything, then there is a strong likelihood that people will get frustrated easily, forget the reason for the deal in the first place, and potentially quit. Mistakes are generally made when parties try to race through negotiations or transactions, which can lead to big problems later. So be patient and try to focus on the mission of the transaction, not how quickly it can be accomplished.

4. Give each church time to discuss and present their expectations.

Allowing everyone to voice their expectations at the very beginning of discussions will enable each church to openly discuss expectations and allow each church to work together to make sure most of the expectations are met. Churches can get frustrated if they have a certain expectation coming into the transaction and the expectation is not met, so it is best if both churches make their expectations known up front.

5. Wisely choose your leader.

The leader during the discussions and negotiations of the transaction will set the tone for how each church’s staff and members respond to the upcoming changes. It is important to make sure that the leader is not necessarily someone who is highly compensated or has the most power. A leader is someone who is respected by all of the participants; someone who is called, personable, sees the vision, stays actively involved, and is equipped to lead the church.

6. Do your homework.

Ask any for-profit company what the most important task is in getting ready to sell or buy a business and the task would probably be due diligence. Although it is discussed above, it bears repeating: Just as due diligence is vital to any for-profit company merging or acquiring another for-profit entity, it is also true for nonprofits because they have liabilities, assets, creditors, leases, contracts, and agreements just like any for-profit company has. Therefore, it is very important that churches conduct due diligence in determining what the other church looks like at its core, underneath the ministries and programs that it conducts on a daily basis.

7. Discuss the ideal “final picture” of the transaction.

What will things look like after the deal is completed? If a merger takes place, the churches should discuss what internal programs, ministries, and outreach programs the surviving church will continue to operate and support. The churches also must consider which employees will be employed with the surviving church. If an acquisition takes place, the purchasing church should decide whether it wants to continue any of the dissolving church’s programs or ministries and whether it wants to keep any of the dissolving church’s leaders.

8. Understand why others failed.

Do this by looking at other churches who have successfully (and unsuccessfully) undertaken the same type of transaction that your church might pursue. It is important for each church to understand what has (and has not) worked for others in the past, so that they can learn from the failures and successes of those transactions.

9. Glorify God.

Remember that whatever the leaders of the church do, however each church behaves during negotiation, and whatever the end result of the transaction is, it should all be done for the glory of God.

10. Understand, it’s a marathon, not a short sprint.

Be prepared to have some really great times and some tough times throughout the process. Be patient. Let the process, negotiations, and discussions naturally happen. If the churches try to rush anything, then there is a strong likelihood that people will get frustrated easily, forget the reason for the deal in the first place, and potentially quit. Mistakes are generally made when parties try to race through negotiations or transactions, which can lead to big problems later. So be patient and try to focus on the mission of the transaction, not how quickly it can be accomplished.

Mergers

What is a merger?

As a preliminary matter, it is important for a church to determine what a merger of two formerly distinct entities is. A merger is a formal legal process in which one of the pre-existing entities completely becomes a part of, or merges, with the second entity. The combined entity that remains after the merger is known as the “surviving entity,” having completely absorbed the other “merging entity.” Following the merger, the surviving entity assumes all liabilities of the merging entity, and continues to transact business as a unified whole moving forward in its daily operations.

There are many complex matters to attend to during a formal merger. It is important that entities considering a merger not rush into the process and devote a great deal of time, prayer, and wise counsel in deciding whether a merger is something that should be explored. A merger will involve the consolidation of at least two, and sometimes more, formerly separate and distinct entities.

Each may have very different cultures and operating procedures. It is crucial that churches considering a merger focus on what the merging entities have in common, and commit to working together in common purpose to develop shared values, vision, goals, and culture during the merger process.

Generally speaking, it is helpful to look at a merger of two entities as analogous to a marriage relationship between two individuals. Like in a marriage, a merger is a complete combination, without reservation, of two formerly separate and distinct entities. The parties involved are not able to pick and choose from only the best parts of each party to merge. In a merger, entities combine the good, the bad, the ugly, and even the unknown.

So, it is crucial that churches considering the merger process devote a significant amount of time, prayer, and analysis to the decision to merge. If it is determined at a later date that a merger was entered into too hastily, or the parties decide to separate at a later date, much like a divorce, the costs of separating can be extremely burdensome, not only spiritually, but also financially.

When should we consider a merger?

If you are faced with a decision to combine two entities, it is important to determine when it is appropriate to consider a merger. There are many reasons why churches consider mergers. Mergers are often considered for economic reasons, changing community dynamics, property and facility concerns, a denominational mandate, or even a church plant that did not succeed as planned, among other reasons.

It is also important to note that mergers are usually not the preferred transaction for combining entities for several reasons. The primary concern is that a merger entails the complete assumption of all liabilities, including unknown liabilities, by the surviving entity. However, there are some circ*mstances in which a formal merger may be the only option.

An example of this scenario would be when there are known liabilities that cannot be dismissed or ignored, such as existing loans or pending lawsuits, which make an asset purchase alone impossible or inadvisable. As such, it may be helpful to consider a merger as an option of last resort if the other options discussed in this article are not available.

How do we accomplish a merger?

If the decision to merge is made, it may be helpful to break the merger process down into a series of steps, which are as follows:

Plan of merger. In this first step, initial discussions between church leadership of the merging entities will take place. Once the entities informally decide to embark upon this process, one of the parties will prepare a plan of merger, likely drafted by an attorney. This plan of merger will be presented to the church boards and possibly shared with church leadership or the congregations to determine if a merger is something that all parties involved would have interest in. Many questions will likely be asked and answered during this stage, which requires coordination and patience so that everyone involved can become comfortable with the thought of merging.

Board resolution. If it is determined that a merger is something that all parties would like to explore further, a resolution of each church board will be drafted, again likely by an attorney, for approval. Depending on the structure of your church, it may also be necessary to obtain approval from any denominational authority during this stage, however this is not always required. If the boards of both churches approve the resolutions, then the formal process of merging can begin.

Articles of merger. The main component of a church merger is the drafting and filing of articles of merger with the secretary of state. Articles of merger typically include the plan of merger or identify the location and accessibility of the plan of merger. Such articles also generally consist of a statement identifying the entities to be merged as well as the surviving entity. In addition, the articles require statements confirming that the merger has been approved by appropriate authorities within the merging entities, the effective date of the merger, and other statements and disclosures required under state law. It is important to note that the laws of each state will control what specific information must be included in the articles of merger, so it is advisable to consult an attorney regarding the specific required components for the state in which your church is incorporated.

Notification and dissemination of the articles of merger. Once the articles of merger have been drafted, they will need to be considered and approved by the governing body of the church. In some churches, this is the board of directors. Other churches require a congregational vote. To determine who has authority to make this decision, the joining church will need to carefully review its corporate documents. Proper notice must be provided to either the board or the voting members of the church, if any, regarding the contents of the articles of merger and the scheduled meeting to vote on such articles. A meeting will then need to be held so that the articles of merger may be voted on and potentially approved.

Meeting, voting, and filing. If the merger requires a congregational vote, at the noticed meeting, church leadership will answer any questions voting members may have regarding the merger and proposed articles of merger. A vote will then be held to determine whether or not the articles of merger will be approved by the church. If the governing body of the church is the board of directors, the board shall convene at a duly held meeting and carefully consider the proposed merger prior to voting on the issue. Once the merger has been approved by the proper governing body, the final formal step in the merger process will be to file the approved articles of merger with the secretary of state. Once the articles are filed, the merger will either be complete and effective or may not become effective until the receipt of a certificate of merger from the secretary of state.

What are the pros and cons of a merger?

As with any transaction, there are positive and negative aspects to a merger. The primary positive aspect of a merger is that it is usually available as an option to merge two churches where there are known liabilities that cannot be dismissed or ignored. It may be helpful to look at mergers as a fallback position that will still be available in most circ*mstances if other more attractive options are not.

Another positive feature of a merger is that a church that is facing difficulty or the possibility of having to close its doors will essentially be allowed to continue its ministry in some form or fashion. This may be preferable to an alternative, such as filing for bankruptcy protection or simply ceasing operations altogether. Also, when two entities merge, the community in which they are located does not lose a church. In some circ*mstances, a merger can result in the creation of a stronger and more stable ministry moving forward.

However, there are downsides to mergers as well that must be carefully considered. As mentioned above, surviving entities will take on all liabilities of the merging entity, even those that are unknown at the time of merger. It is crucial for churches to perform solid and extensive due diligence before contemplating a merger. Even after the most diligent and thorough due diligence possible, though, the surviving church could still encounter previously unknown liabilities once the merger has been completed.

Also, due to the complete absorption of the merging entity into the surviving entity, mergers take more time to complete, and potentially require coordination with other outside parties, such as lenders. Because of the complexity involved and the risk of outside involvement, mergers are also more expensive to complete than other transactions. Finally, because of the likely reorganization and possible replacement of senior staff, the congregation of the absorbed church will often have to become accustomed to new leadership within the surviving entity.

In conclusion, a merger of formerly distinct entities can be an option for many churches. However, the formal merger process can be complex, time consuming, and can involve hidden pitfalls that the surviving entity should anticipate before committing to a merger. These issues must be anticipated and addressed not only before and during the merger process, but oftentimes well after the merger, as the merged entities become accustomed to the new structure in which they are now operating.

As such, it will be important for churches considering a merger to retain legal counsel to guide them through the process so that ultimately, the surviving entity can emerge from the process as a healthy and united whole, and hopefully stronger than it had been as separate entities.

Asset purchase and dissolution

What is an asset purchase and dissolution?

The second option available to churches is to enter into an asset purchase agreement wherein the healthy lead church buys the assets of the joining church. An asset purchase transaction is a contractual agreement that allows the lead church to acquire either all or a selection of the joining assets and liabilities. The written agreements in such a transaction define the assets (and the liabilities, if necessary and/or agreed to) to be sold. In such an arrangement, the lead church would be purchasing whatever the two parties define as “the church” of the dying organization. Because certain assets and/or liabilities can be excluded from the transaction, asset purchase agreements are widely used contracts.

By purchasing the assets of the joining church, the lead church can help to provide the joining church with enough cash funding so that the joining church can pay some or all of its existing liabilities such that the joining church can then completely wind down and dissolve. Assets can be nearly anything: buildings, real estate, hymnals, office supplies, nursery equipment, intellectual property, sound equipment, vehicles, and so on.

Liabilities often attach themselves to the assets and travel with them; so, for example, if the joining church has an outstanding loan on its facilities, the loan would either need to be paid in full or would need to travel with the building in the asset purchase agreement. Depending on the circ*mstances, the joining church may need to notify its creditors of the impending transaction. For example, if the joining church is currently engaged in a commercial lease agreement, the joining church will need to notify its landlord that it will be dissolving and likely breaking the lease agreement earlier than contracted. The landlord may or may not agree to assign the lease to the lead church (assuming, of course, that the lead church wants to maintain the lease).

Asset purchase agreements are fairly simple in nature, though the paperwork can seem complex. Since the primary goal of having a purchase asset agreement is to formally set out the exact arrangement as agreed to by the two churches, the agreement will need to specifically set out certain provisions. A church looking to enter into such an arrangement should absolutely seek advice and assistance from an attorney who can ensure that both parties have completed their respective due diligence requirements, as well as to make sure that the written agreement is in line with state laws and practices.

The written agreement will need to contain provisions that may seem obvious to the involved parties, but—from a legal standpoint—are important to set out in a formal written agreement. For example, at a minimum the agreement should set out:

• the parties involved in the transaction;
• the compensation that will be made for the assets;
• the effective date, or when the agreement will become effective;
• the closing date, if different than the effective date;
• which assets are being acquired; the liabilities that will be attached, if any;
• that the joining church has the authority to sell its assets;
• that the assets are of a value equal to the purchase price;
• that the joining church has no known or unknown liabilities (including legal or financial liabilities) that are not already articulated in the agreement;
• and any other provisions attached to the assets at the time of transfer.

In addition, the formal written agreement should state that the lead church has the authority and ability to buy the assets.

Following the completion of the sale, the joining church should ideally be a mere shell of its former self, existing only long enough to disperse with any remaining liabilities and to complete and file the appropriate dissolution paperwork with the state in which the joining church is incorporated.

When should a church use this option?

Many churches are reluctant, if not completely opposed, to the idea of an “asset purchase agreement.” This reluctance is usually traced to the leaders of either the lead church or the joining church and their general avoidance of any actions that sound too “corporate” in nature. It is true that someone searching the term “asset purchase” online will find results for deals involving banks and oil companies. However, churches really should feel free to view these transactions in a more positive light.

The widespread use of asset purchase agreements in the for-profit world means that these transactions have been tested and well received. In certain situations, particularly when there is some outstanding debt/liability that must be addressed before the joining church can be dissolved (and especially in situations when the joining church just does not have the resources to disperse of these debts/liabilities by their own means), the sale and purchase of the assets of the joining church may certainly be the best and easiest option for both parties. Moreover, from a public relations perspective, many congregation members will understand and approve of such transactions as they may already be familiar with them from their own business experience.

Lastly, it is important that the joining church takes the extra steps to formally dissolve following the closing and transfer of assets to the lead church. For liability purposes, it is generally not advisable to leave an empty corporate shell in existence. In addition, the individual persons who served as the officers, directors, and employees of the joining church will often have moved on in their personal lives and will no longer want their names tied to an organization that is no longer functioning but which, because it is still in existence, could technically be sued.

What are the pros and cons of an asset purchase and dissolution?

As with each of the transactions described in this article, there are both positive and negative aspects to asset purchase agreements that must be weighed by the leaders of both the lead church and joining church prior to entering into such a formal written agreement. In the case of an asset purchase, most tend to be positives for both parties.

On the positive side for the joining church, asset purchase agreements allow it to receive some cash income that it can use to pay off any outstanding liabilities. No church wants to cease to exist without making good on the debts the organization took on in better financial times. Even more, no church wants to leave its former directors, officers, or employees personally on the hook for outstanding debts of the organization, which could be an issue if anyone signed off as a personal guarantee of the organization (something which is often required in order to enter into a commercial lease agreement, and so on). An asset purchase agreement would instead provide the joining church with the benefit of having cash reserves to pay its outstanding liabilities in total, or at least the ability to possibly settle for a lower payoff amount with the debt holder.

The main advantage for the lead church is that it can set the specific terms that the joining church must abide by or agree to in order for the transaction to take place. Generally, most joining churches are looking to enter into such an arrangement because they have fallen on hard times and cannot continue (usually from a financial perspective) to continue their ministry. However, a lead church should proceed with caution when entering into an asset purchase. An asset purchase agreement allows the lead church to proceed with caution by setting its own terms by which it will legally effectuate the joining of the two organizations. This allows for a considerable amount of control on the part of the lead church.

In addition, an asset purchase allows the lead church to merely purchase and assume known assets and liabilities. Whereas a merger leaves the lead church with both known and unknown risks, an asset purchase agreement only gives the lead church what it has paid for and agreed to in writing. For most churches, this option will be a better fit as compared to a merger. Simply speaking, most lead churches will not want to absorb the liabilities of the joining church.

Possibly the only downside to an asset purchase transaction for the lead church is that the lead church must come up with whatever cash amount is agreed to in exchange for the assets of the joining church. As opposed to the third option below, a donation of assets rather than a purchase of assets, the joining church has to actually expend resources in order to obtain the parts of the joining church that it wants. This could cause the lead church to need to take out a loan or pull together resources originally intended for other ministry activities.

Donation/Dissolution

What is a donation/dissolution?

This particular section explores how two churches can join forces through a transaction where a church donates its assets to another church and then dissolves (“donation/dissolution”).

In this scenario, a church determines that it wants to combine with another church. After the church (the “joining church”) identifies and pays off any outstanding debts, it then donates all remaining assets to another tax-exempt, nonprofit organization (the “lead church”). The joining church then formally dissolves by filing the appropriate dissolution information in the state where the church was incorporated. By filing the dissolution information, the joining church will end its corporate existence.

A donation/dissolution is likely the cleanest, most straightforward, and quickest methods of combining two organizations. Because only assets are transferred, the lead church does not face known or unknown liabilities of the joining church being imputed to the lead church. This is of particular comfort to lead churches who will not have to face the unpleasant situation of finding out that the joining church has, for example, had sexual abuse claims filed against it or has previously filed for bankruptcy. Because only assets are transferred, the lead church will not have to fear the risk of absorbing liabilities of the joining church.

When can a donation/dissolution be used?

This particular transaction of combining churches is a great option to consider because it is appropriate in a wide variety of situations—even when the motivation for the combination of churches differs. For instance, a donation/dissolution is appropriate where one church has decreasing attendance, struggling finances, and desires to be absorbed by a healthier, more vibrant church community. It is also appropriate in circ*mstances where a larger church is seeking to establish another satellite campus and a church in the desired location wants to become the actual satellite campus.

Even though this option is highly versatile and is appropriate in a variety of circ*mstances, use of the donation/dissolution should not be used in situations where the joining church has substantial debt that it is unable to pay off prior to dissolving. For example, a church will not be permitted to dissolve if it has an outstanding mortgage or judgment from a lawsuit. Rather, the donation/dissolution should only be used in situations where the joining church either has no existing debt or it has the ability to pay all debts prior to dissolution.

The reason for this limitation can sometimes be found in the church’s dissolution clause. This clause is a key component of corporate documents for most organizations and it is critical to an organization’s operation as a tax-exempt organization. If an organization’s corporate documents do not contain a dissolution clause, state law will likely impose it. Essentially, the dissolution clause requires that, upon dissolving, a tax-exempt organization must distribute its assets to another tax-exempt organization. Most dissolution clauses require that all liabilities be paid prior to distributing remaining assets to another tax-exempt organization.

In today’s economic conditions, the likelihood of finding a church with no debt is probably small, especially when many of the churches seeking to combine with other churches may be doing so because of financial stress they may be experiencing. Despite this limitation, it is not impossible for churches that have debt to utilize the donation/dissolution method so long as the church pays off all debt prior to dissolving.

For example, if the joining church has a large mortgage on its building, the church would not be eligible for dissolution unless it first paid off its mortgage. If a church’s debt is large and the likelihood that the church could pay it off prior to dissolution is minimal, then the church should consider a different option of combining entities, such as a merger.

How do we accomplish a donation/dissolution?

If you are considering using the donation/dissolution method to combine with another church, you will need to be prepared to walk through the following steps to effectuate the transfer of assets and ultimate dissolution of the joining church. Specifically, you will need to do the following:

Review corporate documents of joining church. After identifying that donation/dissolution is the route that the joining church wants to take, the church’s corporate documents should be carefully reviewed to determine whether the documents contain any form of reversionary clause that may restrict the church from donating assets only to a certain organization or church upon dissolution. Oftentimes, an organization’s corporate documents contain a reversionary clause that restricts the church from donating to any organization other than the local or national denominational body that the church historically was a part of. If this is the case, and the joining church wants to donate its assets to an organization other than the one identified in its corporate documents, it will be necessary for the joining church to amend its corporate documents and include a revised dissolution clause that permits the joining church to donate its assets to any organization that has been recognized as a 501(c)(3) tax-exempt organization.

Governing body of the joining church must authorize donation of assets and dissolution. The determination to dissolve must be made by the governing body of the joining churches. In some churches, this is the board of directors. Other churches require a congregational vote to dissolve. To determine who has authority to make this decision, the joining church will need to carefully review its corporate documents. The provisions of the joining church’s corporate documents apply and must be strictly followed even if, in practice, the church does not follow the bylaws. After holding a board or congregational vote, the joining church should properly document the decision either in a resolution or minutes of the meeting.

Governing body of the lead church should vote to accept donation of assets. Just as the joining church must vote and properly document its decision to dissolve and donate all assets, the lead church should also vote to accept the assets. In some situations, the lead church will be establishing a satellite campus where the joining church is located. If this is the case, the joining church should also vote to establish the satellite campus. Again, all decisions should be properly documented and retained in the organization’s corporate records.

Identify all assets, liabilities, and outstanding contracts. The joining church will need to make a detailed list of all assets and liabilities. Assets, such as buildings, land, vehicles, sound equipment, chairs, and cash should be inventoried. It is helpful to create a spreadsheet that identifies the item and an approximate fair market value of each item. For large assets, such as property and vehicles, related documents, such as deeds or title documents, should be compiled for review. As further discussed below, in the case of the transfer of real property (such as land or buildings) or titled documents (such as vehicles), new documents will need to be drafted and executed to effectuate the actual transfer of these assets.

In addition, the joining church will need to compile a list of all outstanding liabilities. Liabilities include amounts owed to vendors, including amounts owed for any loans. The joining church should also compile all vendor contracts that it currently has, including lease agreements, copier agreements, and so on. These contracts will be terminated upon dissolution.

Pay all liabilities. As previously discussed, a donation/dissolution is appropriate in situations where the joining church does not have existing debt or liabilities at the time of dissolution. This means that the joining church either does not have any debt or it has the ability to pay off existing debt prior to dissolving. If the joining church has debt, it should pay these amounts and maintain appropriate documentation regarding such payments.

Identify and address restricted gifts. After paying off all liabilities, the joining church must also make sure that it has returned any designated gifts that have not been utilized for the purpose for which they were specifically given. For example, if the joining church received a gift that was restricted for the use of the church’s building funds, the joining church either needs to return the donation or request the donor’s permission to include the gift as a general asset that will be donated to another tax-exempt organization upon the church’s dissolution.

Donation of assets. Once all liabilities have been paid and restricted gifts are either returned or designated by the donor for use (such as for donation), the joining church will proceed to donate all remaining assets to the lead church. Assets include all buildings, sound equipment, tables, vehicles, money, and so on. In the event the joining church is donating real property (such as land or buildings), it will need to transfer the property by deed and then properly record the deed with the local county clerk. The property records should reflect the donation of the property to the lead church and show the lead church as the new owner of the property.

Filing dissolution information. It is important for the joining church to formally dissolve its corporate existence after all of its assets have been transferred to the lead church. This is accomplished by filing the appropriate articles or certificate with the state in which the church is incorporated. This step is often ignored by churches because it is the last one to be addressed. However, as discussed above, it is not a good idea to leave an empty corporate shell in existence for liability reasons. Failing to dissolve the corporate entity leaves all of the church’s officers, directors, and employees susceptible to legal claims asserted against the church, even if the church is no longer operating. So long as the church’s corporate shell exists, it can still be sued. For this reason, it is imperative that the joining church’s corporate existence be formally dissolved.

Even though the donation/dissolution is the cleanest and quickest method and, overall, is a great option because it is appropriate in a wide variety of situations, there are a number of steps that must be taken in order to ensure that the process is correctly performed.

Issues for all transactions

Corporate documents

A fundamental legal issue that must be considered, especially by the joining church, is to carefully examine the church’s existing corporate documents for any guidance. A threshold question that is often, but not always, answered in the corporate bylaws is, “Who is empowered to authorize the dissolution?” A related and sometimes difficult issue for a member-driven congregation is, “Who is actually qualified as a member?” It may be prudent to carefully scrub the membership roll, publicly and while giving notice, to determine who will be eligible to authorize the dissolution. It is important to have a sense of who is able to vote and legally authorize the dissolution. While it is fundamentally true that these transactions are “religious questions” not subject to state interference, it is also true that such transactions must occur in accordance with the state’s procedures and these often entail the submission of affirmations and/or evidence that the process for authorizing dissolution has been consistent with existing bylaws.

Moreover, it is not a rare occurrence for a joining church to have to amend its own bylaws in advance of authorizing a transaction. This may be due to the need to remove any reversionary clauses that might exist, (for instance, “If the church is ever sold, then the assets shall revert to …”). In some states and in some denominations there is a tradition of having the bylaws reflect that the assets revert to a like-minded church or denomination. This must be carefully considered and dealt with or the transaction will be subject to a collateral attack and may not even make it through the title company’s due diligence efforts. Therefore, it is always best for a church to keep their corporate documents up to date.

Deed restrictions

A related issue that is important to highlight is to not only look to the bylaws and other corporate documents, which may be amended by following the appropriate procedures, but also to give careful attention to the deed of conveyance that brought the church into title in the first place. In some parts of the country, there can be significant deed restrictions that can greatly alter the positive trajectory of any proposed transaction. If the church, for instance, has significant debt and also has a significant restriction in its deed such that the market significantly discounts the property, then a problem may exist. Imagine a situation where there is significant debt, but the deed the church took to get the property states that “the property will only be used as a church and in such case as it is ever sold or dispossessed of its use as a church, it will revert to a particular family, or, that the property may be sold but can never be used for a commercial purpose that includes the sale of alcohol” and a restaurant wants to purchase the property. These kinds of deed restrictions can be much more time-consuming and costly to deal with and may make it much more difficult to manage the transaction process. It is best to know what deed restrictions exist up front.

Employees

Early in the process, churches should have the courage to ask not only, “Which organization survives?” (which, of course, may be a no-brainer in some cases from a financial and operational standpoint), but also should ask the harder and more specific question, “Which employees will remain and what will be their respective roles?” Legally, the remaining church employees likely will need to sign new employment agreements, and anyone with access to children will need new background checks performed. Also, any new volunteers will also need to be appropriately screened and re-qualified.

A potentially more important issue is to boldly initiate a full and frank discussion as soon as practical about the future roles and authority of all the employees involved. This is the big elephant in the room and it should be acknowledged and discussed prior to the completion of the transaction. This will entail fairly high-level discussions and some degree of confidentiality to work through these issues in a way that will increase the possibility of a successful integration. Ideally, this kind of discussion will occur in advance of any legal due diligence and certainly before the drafting of the plan of merger or other transaction documents.

Real property

Assuming the church owns its property free and clear, new deeds will need to be drafted and recorded if the property is going to be conveyed to the surviving church or ultimately sold/donated to a third-party, nonprofit entity. A real estate agent and title company will ensure that any transfer occurs according to the relevant legal procedures. Also, as discussed above, it is important to pay close attention to any current deed restrictions that may be an issue for either the surviving church or a third-party purchaser/donee. Also, if the selling/donating church’s property is subject to a mortgage, the debt will likely need to be paid in full or discussions will need to occur with the lender in order to draft new loan documents. It’s very possible for the surviving, purchasing, or donee church—if it seeks to retain the other church’s property—to either pay off the mortgage or negotiate better terms, depending on the respective financial conditions of the parties.

If the church’s property is subject to a commercial lease agreement, you need to contact an attorney while you initiate your own review and discussions with the landlord. Ideally, you would address the lease situation in advance of the transaction process. The church should know exactly where it stands with respect to its current lease, whether the current lease can be terminated, and what it may mean for the surviving, purchasing, or donee church to be potentially stepping in its shoes and be responsible for performing under the lease if it cannot be terminated.

Personal property

As part of the due diligence process, the merging entity will need to inventory all of its personal property, including books, equipment, nursery furniture and toys, computers, desks, phones, and so on. It is useful to obtain a schedule of fixed assets and their locations, any Uniform Commercial Code filings, a schedule of equipment leases, and a schedule of sales and purchases of equipment in the prior three years. Aside from the physical inventory list, it is also necessary to provide an inventory of outstanding vendor contracts and other commitments.

All material agreements that encumber real or personal property owned by the church, including mortgages, pledges, security agreements or financing statements, if any, should also be examined. It is also helpful to obtain a list of any vendor or service providers who, for whatever reason, have expressly declined to do business with the church.

Restricted gifts

It is important for merging churches and churches that are going to dissolve as a result of the above transactions to examine their restricted donations or designated funds given to their church. Donations or funds that are given for a designated purpose must be used for such purpose(s). In some states, the nonprofit (such as a church) is under a fiduciary duty to ensure that the funds are only used for their restricted or designated purpose. Therefore, it is important that churches deal with restricted gifts and designated funds before getting too far into the transaction process. The easiest way to find out whether the restricted funds can be transferred to the new church or used for a purpose other than the one previously indicated is by directly asking the donor. If the donor agrees to remove the restriction, change the purpose, or allow the restricted funds to be transferred to the surviving church, then such a change should be made in writing.

However, there is a strong possibility that some donors may no longer be at the address the church has on file or may no longer be living. The Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) governs such circ*mstances and other issues regarding restricted gifts. UPMIFA has been enacted by many states in some form or fashion, so the church should examine and understand the UPMIFA laws in the state where the church is incorporated. If all of the avenues above have been exhausted, the church may be forced to go to court and see if the judge will remove the restriction.

It is also possible that some donors may simply request that the donation be returned to them instead of changed or transferred. This situation is likely rare, however, because the donor has probably already taken a charitable deduction for the donation at the time it was given. The IRS has stated that if a donor receives a donation back from the charitable entity, the donor must include such amount in the taxpayer’s gross income in the year received. Therefore, many donors will have no interest in paying tax on the returned donation and would allow the donation to be transferred or the restriction removed. If, however, a request is made to return the donation to the donor, the church should consult with legal counsel in determining whether to return the donation and the terms of the refund.

Tax reporting

The most precious asset a church has is its tax-exempt status. Tax issues and reporting requirements must be examined to ensure protection of the church’s tax-exempt status. The first important tax issue that must be considered when a merger between two or more churches occurs is their tax-exempt statuses. It is best that none of the parties take any action that would jeopardize their tax-exempt statuses because the surviving, purchasing, or donee church will continue to perform exempt activities and will need its exempt status. In IRS private letter ruling (“PLR”) 9314059, two exempt organizations proposed a plan to merge the two existing exempt organizations into one surviving organization. The surviving organization would remain in existence and the other organization’s assets and liabilities would be transferred to, and assumed by, the surviving organization and then would dissolve. The business purpose for the merger was to lessen the administrative burdens of operating two exempt organizations and eliminate duplicative administrative services. The IRS concluded that because the surviving organization after the merger would continue to promote its exempt purposes and the merger of the two organizations had a causal relationship to the furtherance of the surviving organization’s exempt purpose, the surviving organization’s exempt status was unaffected by the merger of the two organizations.

So, will the surviving church maintain its tax-exempt status? Section 508(a) of the Internal Revenue Code, as amended, (the “Code”) provides that a new organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3) of the Code unless it has given notice that it is applying for recognition of such status. Therefore, an issue arises as to whether the surviving church would be considered a “new organization” for purposes of section 508(a) of the Code and be required to apply for recognition of such status. In PLR 9314059, the IRS concluded that the surviving organization was not considered a new organization, meaning notice as described in section 508(a) of the Code was not required.

Another important tax issue is whether the merger or acquisition would give rise to unrelated business income tax. Section 511 of the Code imposes a tax on unrelated business income of organizations described in section 501(c)(3) of the Code. Section 513 of the Code defines “unrelated trade or business,” as any trade or business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable, educational, or other purposes or function constituting the basis for exemption under section 501 of the Code.

Section 1.513-1(d)(2) of the Treasury Regulations provides that a trade or business is “related” to the exempt purposes only where the conduct of the business activity has a causal relationship to the achievement of any exempt purpose, and is “substantially related” for purposes of section 513 of the Code only if the causal relationship is a substantial one. Thus, for the conduct of a trade or business from which a particular amount of gross income is derived, to be “substantially related” to purposes for which tax-exempt status is granted, the production or distribution of goods or the performance of services from which the gross income is derived must contribute importantly to the accomplishment of those purposes.

The IRS concluded in PLR 9314059 that the merger between the two organizations would contribute to the accomplishments of the surviving organization’s exempt purposes; therefore, the transfer of assets with respect to the merger was related to the furtherance of the surviving organization’s exempt purposes. Because the merger was related to the furtherance of the surviving organization’s exempt purpose, the transfer did not result in unrelated business income pursuant to sections 511 through 513 of the Code.

Although the IRS in PLR 9314059 concluded that the merger did not result in unrelated business income, there are several other reasons why the IRS has generally concluded that mergers, acquisitions, or consolidations do not produce unrelated business taxable income. First, section 512(b)(5) of the Code provides that all losses from the sale, exchange, or other disposition of property shall be excluded from unrelated business taxable income. Second, in PLR 9738055, the IRS concluded that the transfer of assets through a merger or similar transaction is a contribution, which does not give rise to unrelated business income for the donor and donee. Third, the IRS concluded in PLR 9530036 that the proposed merger and transfer of assets was a “one time event” and thus did not possess the characteristics of a regularly carried on trade or business within the meaning of section 513 of the Code.

The tax implications of the transactions discussed in this article must be fully examined by a tax attorney or tax professional prior to the transaction taking place. Each transaction is different and none of them are worth risking a church’s tax-exempt status.

State reporting

Churches must be very careful to follow state laws and reporting requirements when dissolving or merging with another church. Each state’s laws vary with respect to all different aspects of a nonprofit organization’s incorporation, operation, and dissolution. For example, Texas law prohibits a Texas nonprofit corporation from merging with another entity if the Texas nonprofit corporation will lose or impair its charitable status as a result of the merger. In California, the attorney general must approve certain transactions when a nonprofit is involved. It is important to examine state law to make sure all laws are followed, the appropriate paperwork is filed with the state and the appropriate state agencies are involved.

Although every state is different, the church is generally required to file the articles of merger or a certificate of merger with the secretary of state’s office. The dissolving corporation will be required to file articles of dissolution or a certificate of dissolution with the office.

While some state laws are very similar, it is always prudent to understand the state law where the church was incorporated. In Texas, for example, the Business Organizations Code section 22.251 provides that the directors must approve a plan of merger, if there are no members of the corporation. If the corporation is managed by its members then, if certain requirements are met, the members can approve the plan of merger. The requirements before a merger takes place are similar, under Texas law, to when the nonprofit corporation sells all or substantially all of its assets. The directors must vote to approve the sale of all or substantially all of the nonprofit corporation’s assets, unless members manage the corporation.

The church must also, if they are dissolving, follow the state requirements for dissolution. In Texas, the directors must vote to dissolve the corporation (unless the corporation is managed by members). The directors in charge of winding up the nonprofit corporation must also pay close attention to the state laws in order to avoid any potential personal liability resulting from the rules not being closely followed.

Final Thoughts

For a host of reasons, mergers, acquisitions, and donations/dissolutions of churches are here to stay. It has taken a tough economy and other struggles for the nonprofit world to discover that these transactions can actually benefit both parties in certain situations. Although the process and the details can seem exhausting, the end result is a potentially larger and more financially robust and stable church where its members can continue to promote the church’s mission, ministry, and good works in its community and beyond.

As it says in Proverbs, “A house is built by wisdom and becomes strong through good sense” (Proverbs 24:3, NLT). This verse emphasizes the good sense that each church will need to exercise to make sure that its transaction is a success and in the best interest of the church. Each church should make sure it assembles a good team of legal and accounting professionals, who are vitally important to making the transaction a success. Each church should also make sure it picks the right church leaders to work with the members of the church, the pastors of the church, and the professionals assisting the church. And above all, make the Lord the main part of the process. “For in him all things were created: things in heaven and on earth, visible and invisible, whether thrones or powers or rulers or authorities; all things have been created through him and for him. He is before all things, and in him all things hold together” (Colossians 1:16-17, NIV).