5 Questions Pastors Ask About Church Incorporation

By Aleshia Redding

Read Time: 4 Minutes

“The government has so much red tape. It really gets on my nerves! Do they really want you to win?” 

Over the years, I’ve heard this sentiment expressed by church and ministry leaders. My response to this might surprise you. Do they want you to win? The answer is yes—and no. Yes, there is red tape, but not without reason. And yes, they want you to win—the right way. 

The rules are in place to make sure that charities, such as churches and ministries, win. The rules also ensure that those who hold charitable status are held accountable and can not abuse the system. For those who are called to start a church, it is worth it to go through the proper channels to establish your organization. 

Today I’d like to answer 5 of the most common questions regarding 501(c)(3) status for church corporations that I hope will help you see why it is worth it to incorporate your church and take advantage of applying for 501(c)(3) recognition.

Question 1: Why do churches need to incorporate?

Corporations are crucial in providing liability protection for your church. Corporations establish what is called “the corporate veil.” It is a term used to describe how corporations set a line of demarcation between the corporate entity (i.e., your church) and the founders, directors, officers, trustees, and other leadership. If you find your church in a lawsuit, the personal assets of the leaders and members cannot be churched. So, forming a corporation is a strategic, protective move for your ministry.

Question 2: Do churches automatically have 501(c)(3) approval?

Churches do indeed automatically have 501(c)(3) recognition with the IRS. This is because of IRC Section 508(c)(1)(A). It states that churches, integrated auxiliaries of churches, associations of churches, and conventions of churches are not required to submit form 1023 to be exempt from taxes. This also means donors who give tithes and offerings to the church can claim a tax deduction for their giving. 

There is, however, a significant caveat. This does not mean churches do not have to follow 501(c)(3) regulations. If a church does not pay taxes but violates section 501(c)(3) rules by paying compensation to employees improperly or conducting a business through the church, it can lose its status and be subject to fines.

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Question 3: What are the pros of 501(c)(3) status?

When we refer to 501(c)(3) status, we are referring to receiving a formal letter of approval from the IRS. This is obtained by submitting Form 1023 to the IRS. Even though a church is automatically exempt from taxes, here are the pros of submitting the 1023 application:

• Protection for donors. Suppose a member’s personal taxes are audited, and your church is not a registered 501(c)(3). In that case, the member may have to go through extensive lengths to prove your church operates as a bonafide 501(c)(3) because a 1023 application was not submitted to give proof of that. 
• Ability to open a nonprofit banking account. Believe it or not, certain banks in certain states require even churches to have a letter proving their 501(c)(3) status to allow them to open a bank account. 
• Certain state and county exemptions. Some states allow for sales tax exemption and property tax exemption. Some of these states you to have a 501c3 approval letter to take advantage of these benefits.
• Receiving special donations. I have spoken with clients over the years who were receiving donations of land, thousands of dollars in construction materials, vehicles, and more. Their donors required them to have 501(c)(3) approval first as proof that the organization really qualified for such donations. Those donors wanted to ensure that their donation investments would be protected and not cause issues for them in the future.

Question 4: What are the cons of 501(c)(3) status?

There are some who may argue that the red tape of being a 501(c)(3) is a con. However, I do not. I have found that with either a business or a charity, there are an equal amount of regulations to follow. The main con is when organizations do not follow the rules to make sure they genuinely operate charitably.

Question 5: What are the requirements to maintain 501(c)(3) status for churches and ministries?

So then, how do you maintain charitable status? First, be sure to file any annual reports with your Secretary of State (or corresponding department) if they are required. States like Georgia, Maryland, and Florida require yearly reports, whereas Texas and Ohio may require one every few years. 

Non-church 501(c)(3) are also required to file form 990 each year with the IRS to maintain tax exemption. Remember, only churches are exempt from the 1023 and 990 filing requirements. 

Next, be sure to stick to what is considered charitable. Your charitable purpose is defined in the articles of incorporation and may be religious, educational, scientific, literary, for the protection of children and animals and certain amateur sports leagues. 

Finally, it is key to avoid non-501(c)(3) activities like political campaigning or running a business endeavor for profit using the charity's funds. 

More knowledge is more power

Today we’ve reviewed the big picture regarding churches, corporations, and 501(c)(3) status. For each point mentioned here, our team can provide additional details to empower you to establish and maintain your church or ministry corporation with security and excellence. At StartCHURCH, we have a variety of resources and services to help you. Consider investing in StartCHURCH University, Launch Suite, or our StartRIGHT program. We have resources that can help you make the most of your tax-exempt status. Please give us a call at 877-494-4655 or click the link below to schedule a call with one of our church specialists!

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