Incorporated Religion Balancing the Risks

Few would doubt the benefits that religious organizations have enjoyed from operating within the legal system that has developed in the modern Western world. Religious organizations not only have unprecedented liberty but also can access an array of legal structures in order to carry out their activities more effectively.

However, at the very beginning the Christian church didn’t have a church building to meet in or a corporate trustee to own the property. Today, religious bodies still start much the way many small businesses do—with a group of persons gathered around an idea or belief who work together to bring it into existence. As time progresses and the group expands, new issues present regarding the way that the members of the group will relate to each other and to the outside world. Such things as, who is in charge, how will decisions be made, will the members acquire property, who will own the property, and who will bear the risk should something go wrong?

Simultaneously, the polity of the group becomes more bureaucratic as levels of management develop and roles became more professionalized. The internal unwritten rules, often made by consensus, at some point become embodied in a written code and made via delegates rather than by the entire group. As the financial resources grow and the group acquires property and starts institutions, the prospect of risk grows ever larger. Persons owning property used by the group will eventually die, creating uncertainty over property used by the group to conduct its mission but owned by an individual.Perhaps the diminishing proximity between members of the growing group or changes in individual disposition might cause property holders to leave the group and take the property with them. Last, risks will arise because the missional activities of the growing group will necessitate interaction with the outside world, thus creating a real risk of legal liability.

The common answer in today’s Western legal environment is to form a corporate entity.1 To achieve this, the members will come to some agreement as to how the corporation will be established, what will be its operating rules, and how they will appoint people to own and operate the corporation. The effect of forming as a corporation is that the corporate entity now owns the property and undertakes the activities formerly conducted by individual members on behalf of the group.

Regardless of whether the corporation is formed for a religious or a secular purpose, using an incorporated entity generally has two advantages over personal ownership by members of the group. The first advantage is that it provides for continuous ownership through the concept of perpetual succession, and second, it creates a clearer distinction between the assets and liabilities of individuals and the assets and liabilities of the group through the related concepts of separate legal personality and limited liability.

Perpetual succession is a recognition of the fact that corporations generally do not “die.” This allows the group members to have the corporation own group property without having to worry about the administrative and estate issues that could arise when attempting to transfer group property from one person to another in the event of death. Perpetual succession allows the corporation holding the property to continue to live and serve the mission of the group despite death or the removal of directors and shareholders.

Separate legal personality and limited liability insulate the members of the group from risk in undertaking group activities. It would be difficult to encourage, and perhaps unreasonable to expect, individual members of the group to bear the burgeoning array of potential liabilities that arise when religious groups undertake missional activities, such as running schools and hospitals. This is especially so since, in the case of religious groups, they are not doing it not for personal gain but for the good of a cause. However, when a corporation is used to undertake the activity, the corporation bears the risk of whatever might go wrong, since it exists as a separate legal person from the members of the group who control it.

The related concept of limited liability provides that if the corporation fails or cannot meet its obligations, then whatever obligations it owes are quarantined, or “limited”. to the assets of the incorporated entity. Creditors cannot generally look behind the veil of incorporation to access the assets of the corporation’s owners in order to satisfy the obligations of the corporation. In simple terms, the rule “don’t put all your eggs in one basket” applies; if you drop one basket, or corporation, everything else is still safe.

The foregoing outlines the rationale for the increasingly incorporated form adopted by many religious bodies. So much so that it might be tempting to think that incorporation is the panacea for all the ills of the hostile and increasingly litigious environment in which religious bodies currently exist in the Western world. However, as can be demonstrated, adopting corporate structures is not without complication or risk, especially for religious organizations.

Corporations have certain rules for operating that do not apply to unincorporated groups of persons. Corporations are not real people; they are a creation of law, and the law not only defines their legal nature but also dictates how they operate.

It is a foundational principle of companies that the directors must, except in limited circumstances, act in the best interests of the company.2 While this appears reasonable, how does this duty fit with a director’s convictions of their duty to the religious organization that appointed them, or their convictions about duty to God?It might be tempting for the average person to think that the company is merely the vehicle by which the religious organization carries out those duties to God. However, this overlooks the longstanding principle that a company is a separate legal person to its owners, and as such, it is owed duties distinct from the interests of its owners or directors.3 So, while in some cases the separate legal nature of a corporation may be a boon, at least as far as liability is concerned, it can also be a restriction if a conflict of interest arises.

For example, if a religious company holds a mortgage over property but the mortgagor is in default, a director may have pangs of conscience, in some circumstances, when faced with having to exercise its powers of mortgagee sale. However, according to company law, if it is in the best interests of the company to do so, the director is legally bound to exercise the rights of the mortgagee. Similarly, a religious company may have some business opportunity that would be objectionable to the members of the religious body at large but is profitable to the company. The director knows that if they disclose the information to the membership in an effort to maintain their convictions, it will devalue the investment opportunity considerably. According to the law, the director’s duty is to the company, no matter how repugnant they or the membership of the religious body finds it. They must act in the best interests of the company, and in most cases, that means keeping quiet.

Another consequence of incorporation is that since corporations are a creation of law, the law can determine who may operate them. Generally, religious corporations would see that as reasonable, since it mostly involves prohibiting people who have had issues with bankruptcy or convictions for dishonesty. However, appointees to leadership of the corporation are most often taken from the membership of the unincorporated religious organization. Although, religious organizations don’t support dishonesty or lack of business diligence, people with a colorful past may well populate their membership. Genuinely converted felons, gunrunners, drug dealers, murderers, as well as the financially dishonest, may find a new direction in life and earn a reputation for honesty, humility, and spiritual rigor among the members of the religious organization.However, their leadership potential within their faith community could be very limited, since it is often the case that accepting leadership in the religious organizations is linked to a corresponding responsibility to accept leadership in incorporated bodies operated by them.

The above highlights a more fundamental problem, however, in that once a religious entity adopts an organizational structure that is subject to state regulation, there may be further interference from the state. What would happen if the law changed to proscribe people from operating religious corporations who have never been criminals according to the currently accepted understanding within religious communities? What other grounds will the state develop to prohibit persons from taking office in a religious corporation, particularly in light of the growing chasm between societal and religious values? For example, what if a religious leader was convicted of a hate crime for preaching their convictions of biblical sexuality? It is worthwhile noting that increasing regulation of charities in some jurisdictions has included a broader scope of persons who may be prohibited from being involved.4 History reminds us that broad state discretions in law are a real threat to religious liberty, particularly for unpopular or new religions.

The problem of falling foul of state morality is compounded for religious corporations because most religious organizations go further than merely incorporating. The process of incorporating is often a precursor for seeking legal recognition as a charity at law, for which there are significant financial advantages. For example, donors may receive credit against their taxes, and the religious organization itself may get tax breaks on income it generates.In some jurisdictions they may apply for and receive generous state appropriations for conducting activities that the state considers beneficial.

Thus, leaders who are countercultural in their upholding of religious values, risk not only losing their leadership role but also jeopardizing the financial advantages of being recognized as a charity at law.

Most alarmingly, despite all the potential problems that may arise from state regulation, the financial consequences of losing the corporation’s recognition as a charity at law is not the biggest risk. The biggest to risk from state regulation is to the philosophical foundations of the religious organization itself. Once the organization has become dependent on the financial advantages of recognition by the state, the religious organization may come to the point where they are more willing to adjust their philosophy, than to suffer financially. Such examples already exist. The early Christian church not only received no tax breaks—it thrived under persecution. In contrast, when the Mormon Church was threatened with obliteration at the end of the nineteenth century, it adjusted the practice of its beliefs.

Conclusion

A corporation is a useful tool in the Western legal environment for carrying out the mission of a religious organization in a way that protects both the organization and its members. However, such structures should be adopted with an understanding of the potential conflicts and weaknesses inherent in their nature. This might mean choosing to keep part of its activities outside of an incorporated structure and thus more removed from state regulation. Religious organizations who have their beliefs at the heart of their decision-making must protect them by being mindful of how state regulation can affect them, not only in the present but also in the future.

1 The structure of the corporation will vary for jurisdiction to jurisdiction, but commonly include limited liability companies, incorporated societies and incorporated charitable trusts.

2 For example, see s131 of the New Zealand Companies Act 1993.

3 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22.

4 For example s181A of the United Kingdom Charities Act 2011 which provides broad powers to disqualify persons from acting as officers in a charity, including for conduct that is ‘likely to be damaging to public trust in charities’ (see s181(7)F).


Article Author: ​Tim Matsis

Tim Matsis is a lawyer from New Zealand currently teaching at the Southern Institute of Technology in Invercargill.