Are Board Members Liable for Church Actions?

By Raul Rivera

Matt is a church planter in Missouri. He recently heard about us from a pastor friend who attended one of our conferences. Matt decided to give us a call since he is planning to launch his church this fall.

He called asking questions about what it would mean for his church to get incorporated by applying for official 501(c)(3) recognition, and he asked about the pros and cons of doing so. Matt also asked about what should be included in his church’s bylaws. Most of his questions revolved around developing a board of directors and the responsibilities that rest upon the church board. 

His previous experience in ministry consisted of a short stint as a part-time worship leader and full-time youth minister for six years. Yet throughout his years in ministry, he had never been a part of a church board meeting. Although Matt had an idea of how a church board operated, he was not certain about all of the logistics of establishing a board of directors for his church.

In his early attempts of requesting individuals to serve as board members, Matt kept getting asked about board member liability. He was not sure how to answer this question because he did not know the answer.

In our experience in working with pastors and church planters across the country, this is a matter that many pastors do not know how to answer. With that being said, this blog post will address that very question. However, before we do that, I want to discuss some of the basic elements of the church board of directors. 

What is a board of directors?

You know that God has called you to be a pastor, you have responded “yes” in your heart, and you are ready to get started! However, who will you look to for support? Your spouse and, perhaps, a few close friends who know your heart and your calling in starting a church. 

You know that you can trust them in the decision-making process for your church, and after praying about it, you are ready to have them on board. You trust these individuals to be a source of support and accountability, but in what other ways can they be a unique part of the church?

These individuals can be selected to be on your board of directors, often referred to as the “board.” The people you choose to be your board members are there to help you make the governing decisions of the church. 

Unlike for-profit organizations, all nonprofit organizations must have a board of directors to govern them. This is beneficial and necessary to ensure that the church remains as a benefit to the public, rather than becoming a benefit to any one person. The board of directors must meet the following conditions: 

1. A minimum of three people,
2. The majority has to be uncompensated, and
3. The majority has to be unrelated.

Finding people to serve on your board of directors may seem challenging at first glance, but if you know that God is calling you to this pastoral position, you can trust that He will bring the right people along who will join you in leading your church.

(Recommended reading: “3 People Your Church Cannot Overlook”)

Who can you ask to serve on your church board?

When it comes to finding individuals to serve on the board of directors, some pastors want to have many of their family members in the governing process of their church. However, it is necessary to understand the importance of being in compliance as a nonprofit and what that looks like regarding who can serve on your board of directors. 

In classifying a church as a nonprofit organization, the Internal Revenue Service recommends that the individuals serving on a board of directors be made up of persons who have a good understanding of the organization’s operations and finances. This means delegating the proper responsibilities to the individuals serving on your board whose strengths are the best fit for those types of positions. 

If your spouse is administrative in nature, perhaps your spouse would be a better fit for a secretary position on the board, rather than in charge of the financial records of the church. If one of your good friends is excellent in bookkeeping, he/she would be a great fit for the treasurer’s position on your church’s board of directors. 

Since all boards must consist of at least three people, a majority of whom are unrelated and uncompensated, it is perfectly okay for you to have some of your relatives serving on your board of directors; just be sure that there are more persons (a majority) serving on the board who are unrelated to you and your family members altogether. 

Who is considered family according to the IRS for board purposes?

According to Treasury Regulation 53.4958-3(b)(1), family members include the following: 

1. Spouse; 
2. Brothers or sisters (by whole or half blood);
3. Spouses of brothers or sisters (by whole or half blood);
4. Ancestors; 
5. Children; 
6. Grandchildren;
7. Great-grandchildren; and 
8. Spouses of children, grandchildren, and great-grandchildren.

It is important to note that this regulation also includes legally adopted children. The fact is that any of your family members can serve on your board of directors; however, to remain in compliance, the majority of your other board members need to be unrelated. 

In addition to having relatives serve on the board, Treasury Regulation 53.4958-3 also recognizes “related” persons to be those who are in business together. Essentially, any two board members who each own at least 35% of the same business are considered persons with close ties. 

Now, you may be thinking that it could be difficult establishing a balanced board of directors. Perhaps you just moved to a new city to plant a church and you are still getting acclimated; you have yet to establish any true connections with people there. What are you supposed to do? 

Well, in situations like this, or even if you are needing to add someone who is not related to you or anyone else on your board, you are able to have people who do not live in your state serve on your church’s board of directors. Often when pastors hear this news they usually breathe a sigh of relief.

Next, let us take a look at what it means to have a balanced board of directors.

What is a balanced board of directors?

A balanced board consists of a minimum of three people, the majority of whom are unrelated and uncompensated. This complies with IRS standards of being a public charity, allows for accountability between members of the board, and helps to prevent a conflict of interest from taking place. 

According to IRS Publication 4221-PC, 

An active and engaged board is important to the success of a public charity and compliance with the tax law. A governing board should be composed of persons who are informed and active in overseeing a charity’s operations and finances. To guard against insider transactions that could result in misuses of charitable assets, the governing board should include independent members and should not be dominated by employees or others who are not independent because of business or family relationships. (Emphasis added.)

In essence, we can see that the majority of your board members should be unrelated and uncompensated so as to help avoid an individual from privately benefiting due to his/her position within the organization.

If your board is unbalanced, do not worry; there is a solution. You simply need to add more unrelated and uncompensated individuals to serve on your board until the proper balance is achieved. 

This may be easier said than done, but as mentioned before, these individuals can be people you know and trust who attend your church, other pastors with whom you stay connected, or even other persons who do not attend your church. It is important that these individuals are persons that you are confident will have the best intentions for the church as they serve.

Should church board members worry about personal liability?

Similar to what Matt was experiencing when he was asking certain individuals to join his board, it is normal for board members, and potential board members, to wonder what liability risks exist on them as a board member. For many, the fear of personal liability stops many from joining a board of directors.

Yet, is this fear founded?

When Matt was talking with one of our team members, he was informed that board members have a fiduciary responsibility to the church (organization). In other words, the decisions and actions of the board of directors should be in the best interest of the church and not for themselves or any particular individual.

Matt understood that board members must act with the best interest of the church in mind, but he wanted to know if board members could be “dragged” into lawsuits should the church ever get sued. This was a major concern for some of the individuals who were on the fence about joining his board. He referenced several instances in which he heard of a church and its board members getting sued, and he wanted to know if and how that could be prevented.

The decisions and actions of the board of directors should be in the best interest of the church.

How to reduce the risk of personal liability

As Matt continued to talk with our staff he was given some steps that his church could take to help shield the board of directors. Below are the recommendations he was given:

1. Incorporate your church: 

When you incorporate your church, you create a separate legal entity from yourself and board members. By incorporating, you are shielded with what is known as the “corporate veil.” A corporate veil is the legal concept that involves liability protection. Under the corporate veil, if court action was taken against your church, the personal assets of the members would be protected.

Many litigating attorneys often try to pierce the corporate veil by trying to prove that the church did not operate as a corporation, and claim that the church was an “alter ego” of the pastor and board members. This is one reason why it is imperative for the pastor and board members to uphold their fiduciary responsibilities. 

Once incorporated, you will need to make sure your church or ministry maintains its corporate status with the state. Each state has its own set of guidelines for what this looks like, so you will want to make sure you are informed and up-to-date on what yearly filings your state requires and when those filings are due.

By not maintaining these filings you are jeopardizing your church’s corporate status and the corporate veil of protection associated with being incorporated. 

2. Keep excellent corporate records:

Corporate records can sink or save a church in a court case. In the instance of an IRS audit, the IRS will spend a majority of its time in your corporate records. In the same way, if a litigating attorney tries to pierce the corporate veil, the majority of the time will be spent reviewing your church’s corporate records. In short, your corporate records need to be well kept. 

We recommend that you keep a digital copy and a hard copy of your corporate records. Such records include:

• All board meeting minutes and resolutions of the board,
• State approved articles of incorporation,
• Board approved bylaws,
• Your church’s 501(c)(3) approval, and 
• Any other pertinent documents or records of your church.

3. Use a corporate seal when signing legal documents:

Anytime you sign a legal document of the church, it is best practice to place the church’s corporate seal over your signature or, at the very least, on the signature page. In addition, whenever you sign a legal document of the church, such as board meeting minutes, you should consider including your title. 

For example, the secretary of the board may want to consider signing board meeting minutes as follows, “John Smith, Secretary of ABC Church, Inc.”

If you do not have a corporate seal of a corporate records kit, you may be interested in our Ministry Corporate Records Kit. This kit is designed to keep years worth of corporate records and to store the stainless steel corporate seal, which improves your church’s corporate information by indicating that you are signing as an officer and not in your own personal capacity.

Additional steps board members can take to reduce liability risk

Since board members have a fiduciary responsibility to the church, there can be instances when a board member is held liable for breaching his/her fiduciary responsibility to the church. (See In re Heritage Vill. Church & Missionary Fellowship, Inc., 92 B.R. 1000 (Bankr. D.S.C. 1988)

Therefore, to reduce the risk of liability for breach of fiduciary responsibility, all board members should consider the following: 

1. Attend all board meetings and the meetings of any committees on which they may serve.
2. Thoroughly review all church financial documents, statements, and reports. If inconsistencies are noticed, seek clarification.
3. Become familiar with how the church is established and its governing documents such as the articles of incorporation, bylaws, and corporate policies.
4. If there is a motion or action that makes you uncomfortable, insist that your objection be recorded in the board meeting minutes. 
5. Resign from the board of directors if you are unable to adequately fulfill your role and responsibility as a board member.

Peace for the journey ahead

By the end of the conversation, Matt felt better and more confident about reapproaching the individuals who were on the fence about joining his church’s board of directors. About a week or so after the initial conversation with Matt, he called us back excited about the progress he had made with his board. Although there was still a spot to fill, he was not going to let that deter him from moving forward. 

Matt decided his church needed our StartRIGHT Program to help him with the process of establishing his church on a solid legal foundation. He also registered for him, his wife, and a board member to attend one of our upcoming conferences. He told our team member that although there was still much work to be done, he had peace for the journey ahead.

Perhaps you are where Matt once was, or maybe you are a little further ahead of Matt in that you have already started your church, but you have yet to take any legal steps for your church. Well, I want you to know that no matter where you are on your journey, it is not too late. 

Give us a call today at 877-494-4655 to speak with one of our team members about the next steps your church or ministry needs to take. Or, simply register and join us at a conference in a city near you. 

Handpicked articles for you:

• “Does a Church Need to be 501(c)(3) Approved?”
• “Why Bylaws Are Important, And How to Make Yours Better”
• “3 Things Every Minister Should Know About Housing Allowance”

---