Churches, synagogues, mosques, temples, and other religious houses of worship in Illinois are typically incorporated, and for good reason. Perhaps most notably, corporate status generally protects religious organizational leaders and members from potential personal liability for the corporation’s actions since the corporation is a distinct “legal person.” In Illinois, churches may be incorporated in two ways. Older churches[1] – and some newer ones – may be incorporated under the Illinois Religious Corporation Act of 1872 (“RCA”). But most Illinois churches these days are incorporated under the modern Illinois General Not for Profit Corporation Act of 1986 (“NFPCA”).
RCA vs. NFPCA - Does this statutory difference matter? Yes, it matters quite significantly, in at least three key ways – (1) for new churches, (2) established churches formed under the RCA, and (3) churches with the dreaded “parallel” corporation problem.
New Church – Which Act Should We Choose?
Imagine a group of people excited about starting a new church. They have begun worshipping together, they have developed a core leadership team, and they have identified a facility to purchase for their religious activities. They are ready to form a corporation called “New Church of Illinois.” Should they incorporate under the RCA or the NFPCA? These days, incorporating under the NFPCA is generally preferred for most churches. Here are five reasons why.
First, the RCA is largely antiquated. The RCA is over one hundred years old and comes from a different, starkly simplified legal era, particularly predating the development of extensive liability risks. (Think slip and fall lawsuits, child abuse claims, employment discrimination issues, and other personal injury claims.) Prior to the RCA’s 1872 enactment, churches didn’t technically own real estate; it was usually held in trust by an individual in the church or by a more formal trust mechanism. With the advent of the RCA, churches could legally own real estate. The RCA thus was not drafted with a view toward modern legal challenges facing religious organizations.
In contrast, let’s look at the NFPCA. The NFPCA was enacted in 1943, in response to proliferation of nonprofits in Illinois – both religious and secular. The amended version became law in 1986. The NFPCA dives much deeper on corporate governance and liability issues, which is helpful especially for churches that operate independently from any denomination.
Second, the RCA suffers from a lack of default governance rules for its corporations’ rules. For example, the RCA contains little to no information on internal governing practices such as determination of members’ rights, quorum, manner of acting, election of directors, conflicts of interests, board governance practices, notice, meetings, committees, finances, and amendments. In some cases, where a denomination provides detailed governance rules through a book of church order, such deficiencies may not be problematic. For example, the United Methodist Church has its own very lengthy Book of Discipline that sets forth hundreds of governance rules and prescribed bylaws. But the fact remains that the RCA lacks any default governance rules, much less other provisions for important organizational matters.[2]
The NFPCA, on the other hand, provides a wide range of applicable governance rules that a church may affirmatively override through its own bylaws or follow implicitly by default. Among other things, the NFPCA addresses membership interests, leadership elections and voting protocols, quorum, updated notice and meeting options (e.g., email notices and unanimous board approvals without a meeting), as well as major corporate changes like mergers, consolidation, and dissolution.
The NFPCA also provides certain governance rules that cannot be overridden, which are helpful too. For example, if an organization’s bylaws provide that members have the power to elect directors, then only members may remove directors. Such constraint can become quite important in the event of an internal nonprofit board dispute. The differences between the two Acts are apparent: the NFCPA covers a good deal more ground than the RCA and uniformly benefits a church’s good through predictable, clear, and occasionally overriding default governance rules. Where such rules are not available through a denominational or hierarchical religious structure, the NFPCA can be of great value to an incorporated church.
Third, NFPCA provides superior indemnification for church leaders. The RCA also provides only minimal liability protection. The NFPCA on the other hand, provides extensive rules for the indemnification of a church’s or other nonprofit’s directors and officers. Such liability protections are critical for incentivizing volunteers to take on the sometimes risky roles of church leadership.
Fourth, the NFPCA makes public the current corporate status of a church incorporated under its requirements. Specifically, the NFPCA requires initial and subsequent annual filings with the Illinois Secretary of State, with its corporate status publicly available anytime through this government agency. Such public accessibility to records can facilitate important church transactions, such as bequests or property ownership transitions. In contrast, the RCA requires only a one-time “affidavit of incorporation” filing with a county recorder’s office, and no annual reports. If a church does not keep the affidavit of incorporation readily available, it can be quite difficult to locate this seminal corporate document (along with any amendments thereto) within the county recorder’s domain –much harder if the year of incorporation is unknown, and nearly impossible if the county of incorporation is unknown.
Fifth, note too that substantially more legal precedent addresses issues arising under the NFPCA, since so many more nonprofits are organized thereunder than the RCA. While litigation may be a remote possibility, it will be far better handled under the NFPCA’s robust governance rules and accompanying case law than the flimsy RCA.
In light of the foregoing benefits, most churches opt to incorporate under the NFPCA. However, some churches prefer to incorporate under the RCA, the advantages of the NFPCA notwithstanding. Notably, and as discussed above, certain hierarchical churches find the simplicity of the RCA better suited to accommodate their particular ecclesiastical structures. Consider, for example, a church whose sincerely held religious beliefs call for leadership through a bishop, or other similar appointed authoritative individual, rather than a board-style of shared leadership. Such hierarchical churches with well-developed internal governing procedures may find the simplicity of the RCA complements well within their ecclesiologies.
For the vast majority of churches, however, the robust provisions of the NFPCA provide a strong corporate structure on which to build their ministries.
Church Established Under the RCA – Time for a NFPCA Corporate Election?
Consider a 100-year old church, whose leaders have recently discovered that the church was incorporated under the RCA. Perhaps the church leaders are preparing to sell or purchase real estate, or perhaps a probate attorney has contacted them about an estate bequest to be honored. After some digging around in old church records and a visit to the correct county recorder’s office (most likely where the original church was located), the affidavit of incorporation is located.
After realizing that future transactions would be simplified if the church were incorporated under the NFPCA, let’s assume the leadership decides to facilitate such a transformation. How does this occur?
Section 101.75 of the NFPCA sets forth a process called “election.” The first step in “electing” to be an Illinois not for profit corporation is to prepare a “Corporate Resolution to Make Election.” This resolution should contain a succinct history of the church, including the date on which its affidavit of incorporation was filed with the county recorder, any prior names by which the church was known, and the date(s) of any amendments to the affidavit of incorporation. In addition, the resolution should include the church’s current corporate purposes, IRS-compliant limitation, a dissolution clause, director and officer information, and the registered agent. The affidavit of incorporation (plus any amendments) should also be attached to the resolution.
This resolution will function as the church’s new articles of incorporation, to be filed with the Illinois Secretary of State upon the requisite approval. At a minimum, the church’s governing board must approve the corporate election resolution. In addition, if the church has members entitled to vote on major decisions under the governing bylaws, such as for a merger or bylaw amendments, then the members must also vote on the corporate election resolution.
What NOT to Do - Parallel Church Corporations
Another example: Church A owns property. Church A’s Council approves the sale of its real estate. Church B offers to buy it. The churches enter into a sales contract, and an attorney orders the title commitment.
Puzzled by Church A’s status as a corporation, the title company asks, “What kind of corporation is Church A?” The reason for the company’s question is because: (1) the church property deed reflects ownership by “Church A, a corporation formed under the Illinois Religious Corporation Act,” and the affidavit of incorporation is dated 1930; but (2) Church A is listed in the Illinois Secretary of State’s records as incorporated under the NFPCA in 1970.
What went wrong? The legal diagnosis: most likely, at some point Church A leaders became aware of the religious corporation status and sought to address the issue through the 1970 incorporation, rather than through the corporate election process outlined above. As a result, Church A now has a “parallel corporation” problem, with the older RCA corporation owning the real estate and the newer NFPCA corporation likely operating for all other purposes. In other words, Church A is legally a pair of corporate twins: Church A-1, the RCA corporation; and Church A-2, the NFPCA corporation.
Such parallel corporation status raises a potential host of problems. For example, does the church liability insurance cover Church A-1 or Church A-2? If Church A-2 were to convey the real estate, would that be legally effective since Church A-1 actually owns it? (Probably not, given the legal disparity of ownership.) On a related note, which corporation owns what assets – those purchased before Church A-2 was incorporated in 1970, and those purchased afterwards? Similarly, which legal rules apply to church governance - the NFPCA’s default provisions or the flimsy RCA? Perhaps most practically, can either Church A-1 or Church A-2 proceed to closing with Church B, or will this legal tangle thwart the deal?
Churches with the above parallel corporation problem may rectify the problem as follows.
- Church A-1 needs to have its RCA corporation “elect” to be a NFPCA corporation, through the process described above. The NFCPA does not authorize Church A-1 to simply merge with Church A-2.[3]
- Once the election is complete, the two corporations need to merge – through articles of merger that are also filed with the Illinois Secretary of State. In other words, once Church A-1 becomes an NFCPA, it may now legally merge with Church A-2. We will call the newly minted NFPCA church “Church A-prime.” Note further that the corporate name could be the Church’s original name from the 1930 RCA incorporation, its name from the 1970 NFPCA, or something different.
- As part of both the election and merger process, the church board needs approve each of these measures – and effectively as both Church A-1’s and Church A-2’s boards. If there are voting members, they will need to approve both measures too. These steps thus may be relatively quick if only the board needs to approve the election, or slower if a membership vote is required.
Some accompanying leadership and congregational education may be needed too, given the legal complexity here. Essentially, this may be explained as a corporate “clean-up” and improvement project, and not necessarily with any lengthy explanation of the NFPCA’s and RCA’s relative merits and disadvantages. Note too that as a result of this corporate merger, all assets belonging to Church A-1 or Church A-2 will now belong to Church A-prime. Correspondingly, no further issue should exist regarding liability, applicable insurance coverage, or applicable governing rules, thanks to the clarified and updated church corporate status.
Back to Church B and the title company: the deal may proceed to closing, now between Church A-prime and Church B. As result of the merger, Church A-prime owns the real estate and can lawfully convey it to Church B. Not only does Church A-prime receive the benefit of sales proceeds from the deal, its leadership and membership can now enjoy much greater peace of mind from this very critical corporate remediation project.
In sum, whether starting a new corporation, updating an older church, or addressing a parallel corporation project, operating a church corporation under the NFPCA generally make good sense. On this fundamental corporate existential level, legally speaking, such attentiveness and carefulness reflects wise stewardship for the church’s long-term well-being and protection.
[1] For simplicity, this article will refer to religious houses of worship collectively as “churches.”
[2] For example, Section 46a of the RCA provides only that governance shall be “according to the usages, customs, rules, regulations, articles of association, constitution, by-laws or canons of any ecclesiastical body, diocesan or like ecclesiastical officer, or sect, or denomination.”
[3] Other options could be for Church A-1 to transfer the real estate and other assets to Church A-2, or for Church A-2 to transfer whatever it owns to Church A-1, along with accompanying contract assignments. Either measure could well be incomplete in its effectiveness, however, depending on the extent of confusion surrounding asset ownership, entity names on contracts, applicable insurance coverage, etc. A corporate merger comprehensively resolves such issues
