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Legal
Counsel > Frequently Asked Questions >
By Congregations > Separate
Incorporation
[While the following discussion deals
with schools in particular, the discussion is also applicable to
other functions day care center, latchkey program, food pantry,
foundation, etc. that may or may not be separately incorporated.]
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Legal Liability. The
separate incorporation of the school, provided that it is thereafter
operated as an entity distinct from the church (i.e., its own board
of directors, its own books and records, and in general, its
operation as a truly separate corporation), will result in the
school not being liable for the debts and the other obligations of
the church, and the church not being liable for the debts or other
obligations of the school. When the school and church are operated
as one common entity, then of course, each is fully liable for the
debts and liabilities of the other. Accordingly, while separate
incorporation does not necessarily ensure the non-liability for the
debts and obligations of the other (because in those instances
where, notwithstanding separate incorporation, the two entities
continue to be operated as though they were one), separate
incorporation at least ensures the opportunity to argue
non-liability for the debts and obligations of the others. Without
separate incorporation, this argument can not even be made.
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Insurance. Procuring
insurance is not a significant issue, surely not from a cost
standpoint. The only thing that is necessary is that if the school
and church are operated as separate entities that clear disclosure
of this fact be made to the insurance company, and that each of the
school and the church be named as co-insured on any policy issued to
the other.
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Control. The school
that is not separately incorporated is, of course, completely
subject to the control of the congregation. When separately
incorporated, the school is subject to the control of its own board
of directors. Control of the separately incorporated school by the
church is indirect in that the church elects the board of directors
of the school, and retains power to approve changes in the governing
documents of the school. The church, however, is no longer
responsible for the day-to-day control issues that the church is
responsible for where both church and school are operated within the
same corporation.
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501(c)(3) Status. The
Evangelical Lutheran Church in America (ELCA) has been afforded
group exemption privileges by the Internal Revenue Service (IRS).
Accordingly, entities that are "controlled or supervised" by the
churchwide organization of ELCA are eligible for inclusion in the
group exemption. Obviously, neither the congregation nor the school
are controlled by ELCA. The congregations are, however, supervised
by ELCA, because they meet the criteria for recognition. In
addition, the IRS permits the inclusion of schools, that include
kindergarten and above grades, as meeting the criteria of
supervision by the Division of Higher Education and Schools. Nursery
schools, however, are not considered to be supervised by ELCA. If
501(c)(3) status is desired by a separately incorporated nursery
school, it must seek its own determination letter from IRS by filing
Form 1023.
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State Regulation. In
many states, schools, whether separately incorporated or not, are
subject to a varying degree of regulation by state authorities. This
frequently requires supplying information for the entire corporate
entity that includes the school. Accordingly, separate incorporation
of the school may render it more practical and feasible to comply
with state regulatory requirements, since this may limit the detail
of information about the church that may thereby have to be
disclosed to the state authorities.
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Discontinuation of
Operations. It is possible that either the church or the school
could experience financial difficulties which make desirable the
discontinuation of one, but not both, of the functions. Where the
two functions are conducted in the same entity, the discontinuation
of one operation almost inevitably affects the continued operation
of the other. However, where the two functions are separately
incorporated, it is far easier to discontinue the operations of one
of the entities without adverse financial repercussion on the
operations carried on in the other entity.
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Number of Employees.
Certain federal (and perhaps state) statutes are applicable to
employers with more than a specified number of employees. For
example, the employment provisions of the American With Disabilities
Act is effective from and after July 26, 1992, with respect to
private employers with 25 or more employees. On and after July 26,
1994, the same provisions will be applicable to private employers
employing 15 or more employees. (A church and its related school is
a private employer for this purpose.) Where the school is not
separately incorporated, the number of employees of the church and
the school may exceed the threshold number. Separate incorporation
of the church and school may result in either the church or the
school, or perhaps both, having less than the threshold number of
employees and therefore not being subject to the legislation.
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Monitoring Separate
Financial Records. This is not dependent upon separate
incorporation or not. If separately incorporated, separate financial
books, records, and statements must be maintained. Without separate
incorporation such separate financial books, records, and statements
may be separately maintained.
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Securing Governmental or
Other Third Party Grants. Many governmental agencies and some
charitable foundations have policies that preclude making financial
grants to churches. Without separate incorporation such policies
probably preclude grants for a church program that is not separately
incorporated. Separate incorporation offers a far greater
possibility, but not a guarantee, of being eligible to receive
grants.
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