What Do Faith-Based Nonprofits Need to Know About Corporate Governance Laws?

By Napa Legal Staff

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When one thinks about the types of laws that most impact religious organizations and religious liberty, corporate governance laws are probably not the first thing that comes to mind. But state nonprofit corporation laws, depending on how they are structured and how religious organizations take advantage of them, may offer important protections for the autonomy of religious organizations in their internal governance and operations.

What are corporate governance laws?

The presence of a separate code for nonprofit religious corporations (like that found in California) remains the gold standard for corporate governance protections for religious organizations. This type of law actually allows faith-based nonprofits to incorporate specifically as nonprofit religious corporations, which singles them out legally as a religious organization separate from other types of nonprofit organizations. The distinction gives them autonomy in certain matters of internal governance and operations, as well as exemptions from some compliance obligations that apply to other types of nonprofits. To learn more about the nonprofit religious corporation in California and its benefits, check out Napa Legal’s resource “Why a Religious Corporation?”

But even in the absence of a specific nonprofit religious corporation code, a state’s general nonprofit statutes may provide important protections specific to faith-based nonprofits. All states have some statutory code that governs the formation and operation of nonprofit organizations. Most states have a separate code for nonprofit or nonstock organizations. A couple states (like Kansas) have some nonprofit-specific provisions within their general nonprofit corporations law; Delaware actually has no nonprofit corporations law but rather one code that governs for-profit and nonprofit organizations alike.

What protections may be available to religious organizations?

So, what protections may be available to faith-based nonprofit organizations in their state corporate governance laws? What legal provisions should you look for?  

Some states provide special protections for the autonomy of religious organizations in certain specific instances. For example, Oregon has a special provision for religious organizations allowing them to have only one director, which is distinct from the general requirement that public benefit (nonprofit) corporations have at least three directors on the board. Such laws acknowledge that religious organizations have a status in society distinct from business corporations and secular nonprofits and should therefore be subject to different standards in their internal decision-making processes.  

Other special corporate governance provisions for religious organizations address specific religious issues. For example, in Idaho the nonprofit corporation act requires nonprofit organizations to have at least three directors on the board. But there is a special provision stating that religious corporations need to have at least one director, not three.¹  

As a general matter, it makes sense that the law would require an organization to have several directors. This ensures that there are several people responsible for oversight of the organization. So why would the standard be different for religious organizations?  

An illustrative example may help. What if a faith-based nonprofit is affiliated with a particular church or denomination and wants the church leadership to have exclusive control over the organization? A Catholic organization may want the sole decision maker to be the local bishop. If a state has a corporate governance provision requiring a minimum number of directors and does not have a religious exemption like Idaho does, it is not clear that the religious organization is free to make the decision to have only one director (the bishop).  

Finally, some states also have a statute clarifying a religious organization’s constitutional rights by expressly providing that, in the event the nonprofit corporation laws conflict with a religious organization’s religious doctrine, canon law, or other religious law, the religious laws or doctrines “shall control to the extent required by the constitution of the United States or the constitution of this state or both.”² This is not really a substantive protection because any state statute that violates a religious organization’s constitutional rights cannot be applied to the organization anyway. Still, such statutes are a sign that the state recognizes the supremacy of constitutional religious protections over state corporate governance laws.

What should I take away from all this?

If you are starting a new religious organization, it may be worth taking some time to reflect on the advantages of incorporating in one state over another. You should consult with an attorney before deciding where to incorporate.

It is worth keeping in mind that incorporating in a certain state may give you the benefit of that state’s nonprofit code for certain internal affairs (such as rules governing your board of directors or indemnification provisions), but there are other laws that apply based on where you are physically located regardless of your state of incorporation. For example, the employment laws that apply to your organization generally depend on the state in which your employees live and work, not the state in which you are incorporated. Be sure you understand the benefits as well as the limits of the choice to incorporate in a certain state.  

Finally, and most obviously, start by looking at the corporate governance laws in the state where your organization is incorporated. By finding the applicable code and simply reading through it, you will gain a better understanding of the requirements and the structure of nonprofit governance in your state.  

If you want to find the corporate governance code that applies to organizations in your state, check out Napa Legal’s Multi-State Compliance Matrix.

To find out whether your state has any special protections or provisions for faith-based nonprofits, take a look at the Faith and Freedom Index.

By understanding these basic concepts and knowing where to find the corporate governance laws that apply to your organization, you can better prepare your organization to follow the law, take advantage of any available protections, and ensure you are in compliance with the laws that affect your organization.

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¹ See Idaho Code § 30-30-603.

² See, for example, Idaho Code § 30-30-107.