The Perfect Church Set Up, Part 2

In part 1 of this series, I wrote that over 1,000 churches per month face litigation.  With that trend currently rising, we must be diligent to heed the warning that Jesus gave His disciples in the first Christian outreach in history.  Jesus warned His disciples that they were being sent like sheep among wolves and that they needed to be "wise as serpents and gentle as doves."  One of the ways we heed that warning is by forming a holdings corporation for the church to protect kingdom assets.

In this article, I want to go a little deeper into the concept of a holdings corporation and show some options that a church has when it has a holdings corporation.

What is a holdings corporation?

The legislation of a tax-exempt holdings corporation is found in IRS section 501(c)(2).  A church is a 501(c)(3), but its holdings corporation is a 501(c)(2).  Under this section of the code the only purpose a holdings corporation is allowed to have is to hold title to property and if the property generates any income, it must turn over the entire amount (less expenses) to an organization which itself is tax-exempt under section 501. 

Is the holdings corporation a separate entity from the church?

Like any other corporation, the holdings corporation is a separate entity incorporated as a tax-exempt, with its own board of directors.  However, under the regulation of 1.501(c)(2), in order for the holdings corporation to be tax exempt like the church, it must meet the three requirements below.

1.     The holdings corporation must be incorporated as a non-profit organization that is described under section 501(c)(2).

2.     The purpose statement in its articles of incorporation must be limited to holding title to property, collecting income from it, and turning over the entire amount, less expenses, to an organization which itself is tax exempt under section 501.

3.     It must be established as a corporation controlled by its parent and the parent must have 501(c)(3) status.

Is the holdings corporation a subsidiary of the church?

The term "subsidiary" means that the parent (church) controls the holdings corporation.  How the parent controls the holdings corporation is important.  At a minimum the bylaws of the holdings company must show that the church can appoint and remove the members of the board.  It does not matter who the church appoints to the holdings corporation. 

If the church controls the holdings corporation, how is the holdings corporation protected if the parent church loses in court?

Because the holdings corporation is a separate entity, its assets cannot be taken away because of the actions of another.  So long as the holdings corporation properly keeps its corporate records in order, as well as its sole purpose to holding assets, then it cannot be dragged into court to forfeit its assets if its controlling organization loses in court.  The corporate veil created between the two entities will not be pierced.

The options of a holdings corporation

In order to most take advantage of the holdings corporation setup for a church, it is best for the holdings corporation to be the legal owner of as many assets as possible instead of the church.  This can be done by simply passing title of the assets to the holdings through an act of the board of directors of the church. 

Going back to part 1 of this article (my previous blog), if the church in our example loses that $3,000,000.00 lawsuit, what would happen?  The church would have to pay off the first part of the judgment through its insurance policy.  But the remaining $2,000,000.00 would have to be paid with its cash, assets and future cash it would receive in tithes and offerings.  This would make a very long and miserable future.  But it does not have to be that way.   Let me explain. 

The fact is, outside of what the insurance company pays out, the church will never be able to pay off the judgment.  Because the assets of the holdings corporation are safely kept away from the tentacles of lawsuits, the parent corporation can choose to release its control of the holdings corporation, officially close itself, and legally dissolve through a bankruptcy.  In the meantime, a new corporation is formed to become the new parent of the holdings corporation, and it's business as usual.

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