Q: Should our church separately incorporate our preschool or daycare?
Pastor Arnie just started at Hopewell Church, where the church averages 200 people in attendance on Sunday morning, but has a preschool/daycare with over 200 students enrolled, as well. The church’s property is valued at over $2 million. Neither Hopewell Church nor the preschool/daycare is incorporated? Should they be incorporated separately or as one entity?
A: To minimize risks, the two entities should be incorporated separately.
Because the preschool/daycare is a high risk ministry involving a great number of children and presumably employees, it is likely in the church’s best interest to incorporate the two entities separately.
Likely, Hopewell Church should be incorporated as a non-profit or non-stock corporation in its state of residence. This involves filing Articles of Incorporation, drafting a Constitution and Bylaws with appropriate language to satisfy incorporation requirements, selecting directors and officers pursuant to the Constitution and Bylaws, and operating accordingly. Hopewell Church will likely have members who elect the Directors and Officers. There is no need for Hopewell Church to complete a Form 1023 to qualify for tax-exempt status because places of worship automatically qualify.
At the same time, the preschool-day should likely incorporate as a non-profit or non-stock corporation with the same steps as the church. However, the preschool/daycare must complete a Form 1023 and apply for tax-exempt status under IRS § 501(c)(3). And, unlike the church, the preschool/daycare is unlikely to have members—unless it has the church as a single member.
No Alter Ego
It is important that the preschool/daycare observe all corporate formalities—annual meetings, filings with the state, etc. It’s also important that the preschool/daycare maintain its finances separately and that it not comingle its funds with the church. By taking these and a few other stops, the preschool/daycare can ensure that it is not an alter ego of the church; thus, protecting both the church from its liability and it from the church’s liability. An attorney experienced in church and non-profit law can advise the church appropriately.
At the same time, the board of both entities can be the same to assure that the preschool/daycare does not begin to operate in a manner contrary to the vision of the church. In the end, having separate corporations, but the same board can provide limited liability and allow the vision to continue unhindered.
If you enjoyed this blog, check out “Does Church Incorporation Give Government Control of My Church” by Clicking Here.