Church Closure: Legal Considerations in Dissolving Your Church

Thinking about the end of your church’s ministry is not pleasant, but giving careful consideration to your church’s legacy before it decides to close can make the closure less painful for the congregation. Church closure is more complicated than the congregation voting to close and turning the building keys over to the Conference or a new owner. The decision also requires ecclesiastical, governance, and legal follow-through to ensure the church meets its corporate legal obligations, distributes its charitable assets according to law, and properly ceases its legal existence. This article describes the general process of church closure and corporate dissolution for an incorporated United Church of Christ Local Church. Every state has its own nonprofit corporate code, which has a specific process a nonprofit corporation must follow to end its legal existence. If you need legal advice about the law in your state, hire an attorney with experience in nonprofit dissolution. This article also does not cover an important aspect of church closure— the celebration of your church’s ministry by the congregation and the church’s covenant partners in the United Church of Christ. Please reach out to your Conference for assistance.

I. Before Deciding to Close: Review Governing and Property Documents

Many churches spend considerable time discerning whether to close. A church considering closure should notify its Conference, which can provide resources and assistance. Churches may also wish to consult United Church of Christ Church Building and Loan Fund, which has a church closure and legacy ministry. The Living Legacy Workbook and Facing Your Church’s Uncertain Future: Helpful Practices for Courageous Conversations and Faithful Decisions, publications of Church Building & Loan Fund, may also be helpful in doing foundational work around church closure. 

A. Review Governing Documents

During this time, a Local Church should review its articles of incorporation and constitution and/or bylaws. The church must follow the provisions in these documents carefully, and may consider amending its governing documents to ensure it’s clear how the congregation can vote to close the church and how the assets will be distributed. A church may discover its bylaws require a particular quorum to vote to close that the church is unable to meet due to dwindling membership, or the vote to close may require a supermajority of the congregation to pass. If the church cannot meet the required quorum, state law may require the church to obtain court approval to close or to amend its governing documents.

B. Review Asset Distribution Clause 

A Local Church should also review its asset distribution clause, which should be in the articles of incorporation but is sometimes in the bylaws. Some churches may not have included this clause when their governing documents were written. Although churches are not required apply to the IRS for recognition of tax-exempt status, churches are required to meet many of the same obligations under I.R.C. § 501(c)(3) as other tax-exempt organizations. This includes ensuring that church assets, as tax-exempt assets, remain permanently tax-exempt. 

The IRS requires that all tax-exempt organizations have a provision in their governing documents that upon dissolution, their assets will be distributed to another tax-exempt organization. The following is one example of a clause that will satisfy the IRS:

“Upon the dissolution of (church name), or disaffiliation of (church name) with the United Church of Christ, assets shall be distributed to the _____________ Conference of the United Church of Christ, or to Local Church Ministries, A Covenanted Ministry of the United Church of Christ or its successor organization, which are organizations with an exempt purpose under section 501(c)(3) of the Internal Revenue Code.  Changes to this bylaw require a vote in favor by two-thirds of the members of the congregation.”

C. Review Property Documents

A church may have real property that is subject to mortgages, restrictive covenants, or deed restrictions that govern to whom the property may be transferred or the use of the property. Ideally, the effect of these restrictions should be determined well in advance of a church’s decision to dissolve so appropriate measures can be taken to avoid or mitigate undesirable outcomes. These situations are heavily dependent on the exact language of the restriction and on state law, and a church should consult with a local experienced attorney for advice on these matters. A church planning to sell its building does not want to be surprised to learn a title insurance company will not insure the title due to such restrictions, or the pool of potential buyers is limited due to restrictions on the property’s use. Restrictions may also affect a church’s plan to donate its property.

II. Closing and Dissolution: Distributing Assets and Filing Dissolution Articles

When a church decides to close, it must carefully follow the law in its state, as well as its bylaws, to ensure that the closure is effective under the law and is not subject to challenge and does not leave the church open to liability following closure. The process of legally closing a corporation under state law is called dissolution. This work is the responsibility of the governing body of the church, and the church’s officers and directors should be prepared to see the work through to completion. In some states, churches are required to notify the secretary of state, the state attorney general’s office, the taxing authority, and other government bodies. Some states require judicial approval of asset distribution, including filing a complaint for dissolution with a particular court in the state. The state attorney general, who generally oversees charities, may need to be a party to the complaint or otherwise notified. The dissolution steps here are in general and for reference only, as your state law will vary.

A. Adopt a resolution of dissolution

A resolution of dissolution is generally proposed and adopted by the governing body of the church (consistory, council, or board of directors) before the church members vote on it. The voting members of the church must be notified in writing of a meeting to vote on dissolution. The number of votes required to adopt the resolution of dissolution may vary by state law and also by the church’s bylaws. For example, some states may specify that at least half of voting members present at the meeting must vote in favor of adopting the resolution. But a church’s bylaws may require a supermajority vote, such as a two-thirds vote of all members, in favor of the resolution on dissolution. So long as the state law permits a church to specify a different number of voters for approval, the church bylaws must be followed.

B. Notify creditors of the dissolution and pay all debts

The church must notify all creditors that the church will be dissolving and pay all of its debts prior to dissolution. Keep detailed records of the creditors notified and the debts paid.

C. Notify required government entities that the church will be dissolving

Some states have laws requiring all dissolving business entities to notify the state department of taxation and other departments, like the department of jobs and family services, to ensure dissolving businesses do not owe taxes or unemployment insurance contributions. While churches may not be subject to certain taxes or to unemployment insurance requirements, they must still follow the procedures outlined under state law to notify these departments the church is closing and avoid being subject to any future assessments or penalties. Some states require a dissolving business— even a nonprofit— obtain a certificate from the department of taxation confirming the business has no outstanding tax liabilities before the state will accept the articles of dissolution.

D. Distribute remaining assets to a tax-exempt organization 

Assets left over after paying creditors must be distributed of as indicated in the church’s governing documents. A church’s governing documents may specify that any remaining assets will be distributed to a named tax-exempt organization, such as the Conference in which the church is located. In this way, the church’s members can ensure the assets of the church will continue to support a purpose substantially similar to the mission of the dissolving church. Some states require a schedule of asset distribution to be filed with or approved by a state entity, such as a probate court or a state attorney general’s office.

Under no circumstances may assets of a dissolving church be transferred or paid to any individual or to a non-tax-exempt organization outside the ordinary course of business. The church may pay its employees through the closure process in the ordinary course, and may pay creditors and vendors in the ordinary course, but must not pay any compensation to the minister or other employees beyond what is reasonable. It also must not distribute money or other assets, like church property, to church members or other individuals. Doing so creates a risk of tax penalties to the recipient and the church. For example, a closing church cannot give a church-owned vehicle to a minister. The vehicle must be sold and the assets distributed to a tax-exempt entity, or the vehicle can be donated to a tax-exempt entity. Churches considering substantial gifts or bonuses to their ministers or other employees on closing should consult a CPA or attorney for advice and information.

E. Prepare the articles of dissolution

Articles of dissolution (sometimes called the certificate of dissolution) generally include the name of the church corporation, a statement that a resolution of dissolution was adopted and the manner in which such resolution was adopted, the names and addresses of the officers and directors, the identity of the statutory agent, and the date of dissolution. The articles of dissolution may also need to include a representation that all debts have been paid and that all assets have been transferred to an appropriate organization specified by the church’s organizing documents. The articles may have to be signed by an officer or director of the corporation. The secretary of state may have a form for articles of dissolution. Usually a secretary of state’s website contains information on dissolving a business.

F. File the articles of dissolution.

The articles of dissolution are filed with the secretary of state’s office in the state where the church is incorporated. The secretary of state may issue some acknowledgment of the dissolution, or may indicate the church is dissolved in its business records. The church may be required to publish a notification of its dissolution in a local publication. Generally, the board of directors continues to act as the board of directors until the business affairs of the corporation are completely wound up. The board should ensure that this happens as speedily as possible.

III. After Closing: Liability for Officers and Directors and the Church

In general, officers, directors, and members of an incorporated church are not liable for the obligations of the church corporation, either before or after dissolution. An exception exists, however, where an officer or director has personally guaranteed any liability of the church corporation. Such a debt, if not paid, remains the personal obligation of the officer or director guaranteeing it. Circumstances exist under which officers and directors may face personal liability for their conduct both while the church is operating as a going concern and after dissolution. For example, officers and directors may be liable for obligations of the church if they voted or agreed to a distribution of church assets upon dissolution without ensuring that all debts of the church were paid. Officers and directors may also be liable for voting or agreeing to a distribution of assets that is contrary to law or to the church’s bylaws (either upon dissolution or otherwise). State laws on the liability of officers and directors for particular conduct, such as gross negligence or reckless misconduct, may vary. Some states may place limitations on this liability.

After properly dissolving, the church corporation itself may face claims for injuries that occurred prior to its dissolution but of which the church was not informed until after dissolution. If the assets of the church have been properly distributed, the person bringing the claim may have no recourse unless the church had an insurance policy in effect at the time that covered the claim. Insurance policies vary widely in whether they are “claims made” policies, which cover claims while the policy is in effect regardless of when the injury occurred, or “occurrence” policies, which cover injuries that occurred while the policy was in effect. Dissolving churches should ensure that copies of the church’s insurance policies are permanently maintained in a safe location.

The information provided in this article is not legal advice.  If you need legal advice, please consult with an attorney.