Case Study: Improper Incorporation of a Church

A local group had used an accountant to incorporate a new church. The accountant used a corporate formation service to handle the incorporation process. The non-attorney service prepared a certificate of incorporation under not-for-profit law and filed it with the County Clerk. Several years later, as the church was in the process of leasing space in their church to another church group, it was discovered that the church was not anywhere listed as an entity on the State Corporate records.

The accountant and pastor came to our office to research the matter. Upon receipt of the supposed certificate of incorporation, the issue was immediately apparent to Tracy Jong. Churches that have a place of worship in New York must be incorporated under Religious Corporations Law. Although a document was filed at the County Clerk, it would be ineffective to properly incorporate a church. Certificates of Incorporation for a not for profit corporation can only be filed with the Division of Corporations in Albany. If the not-for-profit is a religious corporation, it cannot have a place of worship in New York to use this procedure.

The accountant and pastor were surprised to learn that the County Clerk takes a fee to file a document, but does not pass on its validity as a legal matter. The County Clerk does not have any obligation to advise a filer that a document is improper; its job is only to file and record the document. After operating several years, the church leadership learned they were not legally incorporated. This affected liability of the church leaders and raised issues with the validity of a contract they planned to make. An entity that did not legally exist could not enter a contract.

Our office quickly prepared the necessary paper work to properly incorporate the church and met with the pastor to outline the procedure they would follow over the next 2-3 weeks. The error would be corrected in about 16 days, in time for the lease to proceed. Properly incorporated, the personal liability of church leaders was no longer an issue.

Not for profits can have complex issues and mistakes may not be discovered until there is a crisis. Working with an experienced attorney can help give you peace of mind that you won’t have with a do-it-yourself or internet service provider. Experience matters.

 

Case Study: Improper Not-for-Profit Formation

A local not-for-profit association had been successfully operating for more than two decades. The existing leadership, ready to retire and to transfer the reigns to a new leadership team to carry on their important mission. Our firm was asked what steps would be necessary to elect new officers and directors.

When we reviewed the books and records, we discovered that the not-for-profit was never actually incorporated. Rather, it had been operating (improperly) under a “d/b/a.” The IRS considered it a private foundation so tax exempt status was valid, but there was no protection from personal liability for the directors. With many professionals on the existing and incoming Board (doctors, lawyers and accountants), this was a serious concern. Our office was able to properly incorporate the organization and discontinue the d/b/a of the founder.

We also assisted the charity with changing its name to expand its mission and core functions, allowing it serve more people in the community.

We were able to walk the new leadership through its organizational meeting and provide materials to teach the directors about their fiduciary responsibilities and liabilities as board members for the not for profit corporation.

We also helped the charity to adopt by laws, a mission statement, key policies to preserve the not-for-profit tax exempt status and to successfully operate under the new leadership.

If you have a not for profit corporation, you should have it reviewed and audited periodically to be sure everything is in order and the charity is in compliance with applicable laws  and regulations. If you uncover unforeseen issues, Tracy Jong Law Firm can guide your group through the process of correcting mistakes and bringing you into full compliance.  We can even give your group’s leaders a class to teach them about their responsibilities and liabilities as directors and officers and how to avoid issues of non-compliance with the rules and regulations governing not for profit organizations.

‘Good Counsel’ for not-for-profits

Good Counsel: Meeting the Legal Needs of Nonprofits by Leslie Rosenthal is a practical resource on the legal issues faced by not-for-profit corporations. It also has a companion website that contains checklists, work plans and sample documents that help you hit the ground running as a director. You will feel adequately prepared for guiding the organization as a public entity, employer, fundraiser and advocate for its cause and mission. More than a crash course and handy reference, it is your co-counsel! Visit  www.wiley.com/go/goodcounsel for more information.