I shoot 60% of my stuff at church but it's a different market. My work is very much commercial in nature there. Web based images, advertising, archival, special event, graphic based "stock photos", concerts, dignitaries etc. (As a matter of fact, I am shooting a dress rehearsal for the Christmas thing tonight - the concert is Sat. and Sunday where I'll shoot those too!). I literally take thousands of shots a year for them but not on a portrait level of the entire membership (even though I think I could have done far better than O-Mills). I do have a large number of outside clients from church. The members of which I am one of, hire me all the time for portraits and other things. Although, I have never shot a wedding there... Hummm. I just realized that.
I would thing long and hard before I jumped into portraits for directories and the like mainly because of the publishing end of it. Having said that, if the church is willing to do that end of it, I might consider it with a few stipulations. First of all, I would not offer the "free 8x10" to the membership unless the church itself is paying a part of the sitting fee for each family. Because you might shoot say 200 families and of that if half of those families are not ordering any prints at all from you, you can very quickly loose money. Just think of it as a $5.00 investment per 8x10, that can be a quick $500.00 in the hole.
Secondly, (not knowing anything about what you are capable of shooting) do you have what it takes to pull it off? IE equipment, experience, venders (to produce the volume of proofs and prints you will end up selling hopefully, because I don't think printing them yourself ala inkjet is the way to do this) and time? And as far as proofs go, I'd offer very few to them to choose from. 8 to 10 tops! This isn't a full session deal where you have 2 hours, several outfit and setup changes. It's 15 minutes at the most. Offer the full studio deal to them at your prices and aside of the church deal if you want, but keep the other simple.
I by no means want to discourage you from this but I would ask yourself a few questions before I started this.
I have been dealing with churches and photos for several years now. I am my churches official photographer and it is a larger church than you have mentioned but churches and its members can be fickle, demanding and I hate to say it; unforgiving.