7 Things to Be Aware of When Closing a Church
Some are estimating that 1 in 5 churches will not survive the pandemic and will close for good over the next 18 months. COVID-19 shutdowns have placed a heavy strain on pastors, congregations, and their finances. Many churches have had to dig deep just to hang on this long. But at the end of the day, we are likely to see thousands of currently closed churches not reopen.
For those leading churches that are likely to close, it is tempting to just walk away. No one likes to oversee the end of a church or do the thankless work of winding a church down correctly. But if you are in this position, here are seven things of which you need to be aware:
- Church Board Member Liability. Church board members are legally responsible for putting the interests of the church ahead of their own interests and may, in some cases, be held personally liable if they are grossly negligent in their handling of the church’s interests. So long as the Church is legally in existence, board members need to carry out their fiduciary responsibilities to the church, this includes the responsibilities attendant to closing the church.
- Dissolution Clauses in Articles of Incorporation and Bylaws. Often churches have dissolution provisions in their articles of incorporation and bylaws which govern how and when the church corporation can be dissolved. Many of these provisions dictate how church assets and properties are to be distributed upon dissolution. Some dissolution clauses provide that the congregation’s property is to be distributed to the denomination of which the congregation is apart.* Churches can also amend their articles of incorporation to include dissolution provisions if they do not already contain them.
- Dissolving the Corporate Entity at the State Level. Most churches are incorporated under a state not-for-profit corporation act or religious corporation act such as the one we have in Illinois. These statutes often provide for how a corporation can and should be dissolved. You or your attorney should also check with the state entity that approved the church’s incorporation to ensure that all the necessary forms are filed to properly dissolve the corporate entity. Be prepared to submit documentation of the Church’s decision to dissolve. In Michigan, for example, churches have to file a Certificate of Dissolution. Some states require churches to register with their charitable/tax-exempt divisions and may also require notice of a registered church’s dissolution.
- Notifying the IRS. Churches which annually file a Form 990 with the IRS can provide notice to the IRS of the dissolution. To date, there is no specific guidelines for how to notify the IRS of a church’s dissolution but the IRS may ask for supporting documentation and financial information.
- Account for All the Church’s Debts. To the extent possible, church leadership should do a comprehensive review of all existing church obligations and debts. There may be loans or legacy costs in the form of pension payments to former pastors or employees that need to be taken into account when winding the church down. It may be necessary to consult with an accounting professional to close out bank accounts, payroll accounts for any employees. and to reconcile the church’s finances.
- Distribute Church Property and Assets. Before you dissolve a church, it is important that any church property or assets are distributed in accordance with the law and do not inure to the personal benefit of any church board members. Determine how the property or assets will be sold and be sure to document everything. And in the event they will be donated according to the dissolution requirements for nonprofits, be sure that the intended recipient qualifies to receive the property or assets.
- Maintain Corporate and Confidential Records. Over the years a church may acquire a lot of confidential records. These should be maintained in strict confidence well after the church is closed or dissolved. In addition, it is recommended that church leadership maintain corporate records, particularly records relating to how assets were sold or distributed, for up to five years after dissolution as the records may be needed to prove that everything was done properly.
If your church would like assistance with the many legal issues that arise when closing a church, the attorneys at Dalton & Tomich are here to help.
* Churches in hierarchical denominations may have other requirements to fulfill with the denomination. A church that wants to disaffiliate from its denomination and not distribute its property to the denomination may also have the right to do so in many states.