New churches should consider the following steps in establishing the proper legal structure.
Step 1 – Select a Church Name– Start with a great name. Before an organization can incorporate and become tax exempt, it must first select a name.
Step 2 – Establish a U.S. Post Office Box or Address– If you do not have a permanent church facility, consider getting a PO Box. A church name is all you need to get a box. Some local mail shops offer boxes with an actual address rather than a box number. If you start in temporary rented facilities, consider getting a box for your official mail. If you move to another facility, you will continue getting your mail to the box without interruption.
Step 3 – Incorporate the Church– Incorporation is required before completing the remaining steps below. It is accomplished through your state’s Corporation Commission. Consider consulting a non-profit attorney who can provide you with professional advice regarding unique laws or requirements in your state.
- Additionally, there is specific wording that must be included in your Articles of Incorporation to satisfy the IRS 501c3 requirements. Include this wording now to avoid problems later when filing your 501(c)(3) application.
- In most states, an application form can be downloaded online and the template already includes the required non-profit wording (but not necessarily in all states).
- For example, in the State of Virginia, a simple one page form is filled out, signed and mailed into the State Corporation Commission. The application fee is $75.
- In Virginia, the approval is typically returned within two weeks of application receipt. Upon approval, most states provide you a Certificate of Incorporation.
To get started, simply do a Google search for your state’s State Corporation Commission. Download the forms and send them in. Click here to visit the IRS state link web site.
Milestone: Complete Federal Legal Requirements
Three key things to keep in mind:
- Board of Directors: In many states you will be required to identify the initial Board of Directors (Elders for many churches). In step 6 (Develop Bylaws), you provide further clarification of how Directors are selected and what their responsibilities are. Consider your plan for Directors before submitting your Articles of Incorporation.
- Non-Profit Wording: As noted above, there is specific non-profit wording required for non-profits. This wording covers specific items such as instructions on how assets will be disbursed if the organization shuts down. Get this wording correct.
- Membership: The IRS (501(c)(3) application) and many states ask whether you will be a “membership” organization. Make sure you understand their definition. In some cases, “membership” means something different to tax people than it does to churches.
Step 4 – Get a Federal Identification (Tax ID) Number– An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is a nine-digit number that the IRS assigns to business entities. The IRS uses this number to identify taxpayers that are required to file various business tax returns. EINs are used by employers, sole proprietors, corporations, partnerships, non-profit organizations, trusts and estates, government agencies, certain individuals and other business entities. The process of obtaining a Federal Tax Number is very simple and it’s FREE (one of the few steps in the process that is free). Click here to apply online via the IRS web site. It’s painless and required for your 501(c)(3) submission.
Step 5 – Establish a Church Checking Account– Armed with the products from steps 1-4 above, you can open a business checking account. Many banks offer a free (no fees) checking account to non-profit organizations. The bank may want to see either your 501(c)(3) application or your tax exempt approval letter from the IRS to set the account up as a non-profit. You can initially set the account up as a regular account and then change it to non-profit at a later time (if required while waiting on your 501(c)(3) submission). Opening an account will usually take two trips to the bank. One visit to obtain the application form and a second to submit the form. In most cases, your designated Board will need a signed resolution to establish the account.
Step 6 – Develop Bylaws– Bylaws define the operating procedures and guidelines for the administration of your church. They cover positions, responsibilities, how decisions are made, and requirements for official meetings and record keeping. [bctt tweet=”So much to learn about legal stuff! #churchplanting”] Solid Bylaws are a key factor in preventing disunity and confusion in the future. In some states, bylaws are optional. In others, they are required. Bylaws are a great way for expectations and standards to be clearly defined and documented.
- How are new staff hired?
- Who has to approve the budget?
- How does the church enter into contracts?
- Is there a congregational vote on decisions or does the Board (elders) make operational decisions?
These are just a taste of the types of issues that can cause confusion later. A simple set of Bylaws helps define how a church will administratively handle decision making (i.e. who needs to agree with what). A simple online search for “Church Bylaws” will yield several examples. Bylaws are public record and you should be able to easily review the those being used by other churches.
Don’t be shy, ask to see the Bylaws from any church you have a relationship with! You can learn a lot and pick up some good pointers along the way.
Step 7 – Obtain 501(c)(3) Advantages – Although churches are not actually required to file for 501(c)(3) status, there are several advantages. Most significant is the credibility afforded to the new church by receiving official 501(c)(3) status. Contributors to your church will have no questions about your validity. The 501(c)(3) application is by far the most tedious and time demanding step in the organizational process. The IRS has streamlined their online application process but it is still time consuming and relatively costly ($850). Click here for the IRS 1023 application form. The IRS site also has separate detailed instructions for completing the form.
Step 8 – Minister Ordination and Pay Issues– Each new church should establish a written policy on commissioning and ordaining staff. The policy should cover roles, responsibilities, qualifications and expectations for ordained/commissioned staff members, including a clear definition of ordination. Minister pay is a complicated issue (e.g. housing allowances, medical allowances, SEPA vs FICA social security system, exemption from Social Security, etc.). There are several good books published yearly that cover minister pay issues in detail. (e.g. Church and Clergy Tax Guide, Zondervan’s Ministers Tax and Financial Guide, Accounting for Churches, etc.)
Step 9 – Obtain State Sales Tax Exemption– After receiving your Federal 501(c)(3) status, don’t miss the opportunity to take advantage of this great perk. Apply for an exemption from state sales tax. States define rules regarding sales tax exempt organizations differently. It is incumbent on nonprofits to understand state-specific rules and their implications for transactions within a specific jurisdiction. For states that do allow the exemption, a separate application form must be completed and submit.
Don’t Reinvent The Wheel!
Don’t Be Intimidated!!
Don’t reinvent the wheel in creating your submission documents above. Ask other churches for their successfully completed form and use these as templates to get you started, but don’t hesitate to seek professional advice where necessary.
The steps above are fully within the capability of most church planters. Don’t be intimidated. Most of the state and federal organizations will answer your questions and help you. Be patient.
If you do desire additional help/guidance, consider either paying an attorney or professional, or purchasing StartCHURCH’s simple program. StartCHURCH offers an inexpensive program to guide new churches through the steps listed above.
In addition to the fees for any professional services, there are also application fees paid to the Government. For example, most states charge approximately $100 for Incorporation and the IRS charges $850 for 501(c)(3) submission.
2 thoughts on “Church Planting Tutorial: 12. Legal Issues”
Correct me if I am wrong but If I understand correctly, a church is automatically tax exempt, so it is not necessary to file 501c3?
Joseph, Thanks for your comment, this is an important topic and one we feel strongly about. As stated in Step 7, churches are not actually required to file for Tax Exempt status; however, the credibility afforded to the new church by receiving official determination letter from the IRS under Tax Code 501(c)(3) effectively eliminates obstacles for potential contributors. In addition, many companies offer discounts to tax-exempt corporations. This status is quickly substantiated by presenting your successful 501(c)(3) filing, i.e., your determination letter. Hope that helps! P4P
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