The purpose of this exercise is to explore the consequences of having a mismatched business structure. This
Question:
The purpose of this exercise is to explore the consequences of having a mismatched business structure. This week we are taking about business structures and the legal ramifications of the various business structures. There are times when a business may choose a structure that does not fit well with the type of business they are operating. Usually, when this happens the business can start experiencing problems with lawsuits, reduced profitability, tax audits etc.
Churches were historically structured as nonprofit, sole proprietorships. The pastor was the owner and made all of the decisions. He would decide whether the church bought property, autos, furniture etc. The pastor would determine what was in the best interest of the congregation. He would decide what to do with the donations and offerings. Under these structures, churches enjoyed tax free benefits, so long as their activities were true to their religious charter.However, somewhere along the way (20-30 years ago), churches began structuring the church as LLC’s or Corporations. Under these two structures, the business is required to have a board of directors and officers. The board of directors is the body that makes all of the decisions regarding the organization to protect the investors. Their job is to protect the business from bad decisions that would destroy the business. The officers create and implement strategies to return equity to the shareholders. The board of directors are required to approve all strategies.
While churches changed their structure on paper, they did not change the structure in practice. The pastors continued to maintain all of the control and made all of the decisions. Even when the boards were created, the pastors designated themselves as the shareholder, board of director member, and CEO and President. They continued to decide what was best for the organization. More importantly, they continued to collect the offerings and decide what to do with the offerings. In this sense, a lot of money was directed from the organization itself and redirected to provide a lavish lifestyle for the pastor and his family. Then the lawsuits began. As churches structured themselves as corporations, members began suing the churches for mismanagement of money. The churches began losing these lawsuits. The courts held the churches to the same standard as any other corporate structure. As a result, they lost the lawsuits, for not abiding by the corporate structure requirements of having shareholders, Board of Directors and Officers to manage the business. More importantly, when sued, churches were able to keep their personal assets from the lawsuit judgments. Please answer the question below.
Do you think that churches should be allowed to choose a nonprofit Corporate structure, when the pastor refuses to give up control of the management of the organization. This management of the church includes acquiring assets, expanding, various functions and all decisions regarding finances. Please explain in detail, why or why not. Please demonstrate an understanding of the structures and the features of each structure.
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts