08 Sep 2020

Do Churches Need to Incorporate?

Stevonne German

Many will try to tell you that starting a church is just like starting a business. While the processes might be similar, there are many nuanced differences between creating a for-profit corporation and a church. 

One major difference between a non-profit organization and business corporation, such as an LLC or an S-corporation, is that a non-profit is not owned by one person or even a group of individuals. 

So how does that work? For a church to be able to transact business, it must become a legal entity. 

In today's blog, we will talk about why establishing your church or ministry as an ecclesiastical corporation is of absolute importance, as well as the benefits of incorporating and how to complete the process. Let's get started!

What is indemnification?

A significant benefit of being incorporated is that once a church becomes incorporated under state law, they are afforded limited personal liability protection known as indemnification. 

First, the church has to show that the pastor and the board of directors do not act solely by themselves when making decisions for the church. Instead, they serve as directors of the church and on behalf of the church. 

This concept is known as a "corporate veil of protection," like an umbrella. If you use your umbrella, and you will be protected from getting wet. Indemnification is the same concept. The pastors and board of directors are protected as individuals when making decisions on the church's behalf. 

The same is true for any business or non-profit that chooses to get incorporated. 

How does one incorporate?

The process for incorporating is two-fold. 

When you start the organization, whether it is a business or non-profit, there are at least two levels to register. Typically, you will have a state-level registration and then a federal-level registration with the IRS. 

Each state has its requirements for what needs to be detailed in the articles of incorporation. Most often, this document contains information such as:

    • the name intended for the corporation
    • the purpose of the corporation
    • the name and address of the registered agent (meaning the person that is going to be speaking on behalf of the organization
    • and the information about the nature of the non-profit or the business itself.

Therefore, if someone is looking to get incorporated, they must first look at the state's requirements. 

Every state is different. Some may require a charity registration, while others may require a business registration. There are many facets, so it's important to reach out to your state's Secretary of State office to make sure you know your obligations.

What is a registered agent?

As I mentioned before, a registered agent is a person who resides in the state in which the organization is going to be incorporated. 

This person must have a physical address in that state and act as a contact person to receive notifications about the non-profit from the state. 

For example, if I wanted to start a soup kitchen in California, I would need someone physically there to act as a registered agent for my organization. 

Are there any IRS requirements for the articles of incorporation?

Yes, the IRS requires specific language to get the articles of incorporation approved. That aspect is going to fall on your purpose statement and dissolution statement. This language is referred to as the organizational test requirements. 

The IRS requires the purpose and dissolution statements because it proves that the church meets the exemption requirements of section 501(c)(3). 

Since the state does not usually require the same language as the IRS, the church has to file the articles of amendment and then add the organizational test language, causing delays and a lot of extra time and money. That's why it's wise to go ahead and take care of the language at this early point. 

The IRS will not allow a church to apply until that language is included. At a minimum, the language should contain: 

    • A purpose clause. 

This clause states the specific purpose of the organization. 

    • A dissolution clause. 

This clause states how remaining assets will be used exclusively for exempt purposes, such as charitable, religious, educational, and/or scientific.

    • The "no, no, not's." 

This section explains exactly what will happen if this organization dissolves. 

With the StartRIGHT Service, our team of specialists will help you develop articles of incorporation that will give you a strong legal shield, ensuring your limited legal liability, and will protect you and your members. You can create articles of incorporation that reflect your vision and mission. Give us a call today at 877-494-4655!

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The Purpose Clause

The purpose clause states the reason for the formation and provides the scope of activities the organization will undergo. 

This is not to be confused with a list of activities; those are different, which is merely how an organization plans to accomplish its purpose. 

So someone can say, "I want to start a soup kitchen. The purpose of the soup kitchen is to support the community." 

The activities in that soup kitchen may be: we are going to hand out dinner every Friday night, and we're going to hand out breakfast every Monday morning. 

To conclude, the activities and the purpose clause are two different things. 

You should include the following items in your church's purpose clause:

    • Include language that clearly creates a religious ecclesiastical corporation, allowing your ministry to expand into various activities. 
    • Include language regarding the licensing and ordination of ministers. If your church or ecclesiastical ministry desires to ordain ministers, this is a must-have. It causes many headaches later if individuals want to use the benefits given by the IRS. 
    • Include a blanket statement to cover all of the necessary suitable or convenient activities related to the purpose. 
    • Include a statement that the corporation is organized and operated exclusively for religious purposes within the meaning in section 501(c)(3) of the IRS code. 

The Dissolution Clause

This clause explicitly states where the corporation's assets will go in the case of a dissolution. 

The money and the assets of the non-profit organization must be permanently dedicated to another tax-exempt purpose. They cannot exist to benefit any individual or group of individuals. 

At StartCHURCH, we recommend a clause stating all assets remaining after the payment of debts and liabilities. 

 Once those are paid off, the remainder should go to one or more organizations that are also exempt according to the 501(c)(3) code or code 170(c)(2) of the revenue code. 

For example, let's say I dissolve the California pantry previously mentioned, and I have $1000 left in the bank account after paying off the bills and debt. 

We recommend that you take that $1000 and donate it to another non-profit. 

No, No, Not's

Every non-profit corporation, churches included, should explicitly state that it will abide by IRS standards as a tax-exempt organization within their articles of incorporation. 

This is known as non-profit language and is what we refer to as the "no, no, not's." This section includes statements that essentially say, "We will not do this, we know we won't have this," etc. 

Once the articles are filled out, where do you send them?

Once your articles of incorporation are filled out and signed, you will send it to the Secretary of State with the registration fee.

There are some states in which you must receive county-level approval, after which you can send your documents to the state. 

Once the state has approved the documents, then the church or the ministry can function as a legal entity. At this point, an organization can start a bank account, receive donations, and take the next best steps. 

Receiving the approved articles of incorporation back from the state is like getting your birth certificate when you're born. My organization is brand new, and now I have a birth certificate. That's essentially what the approved articles state. 

Once the articles of incorporation have been approved, your church, ministry, or non-profit is in official existence!

What is the purpose of a FEIN?

FEIN means Federal Employer Identification Number. 

Most people will hear "EIN," which is the same thing. It involves filling out a short application called Form SS4. You submit that form to the IRS. 

The FEIN is simply an identification number for tax, banking, and credit building purposes. This number can be compared to a person receiving his or her social security number. 

A church will use this number much like a person with their social security number to opening a bank account, establish credit, and file all pertinent tax informational returns.

The number then becomes the organization's tax identification number.

When you are applying for the FEIN, one of the steps is to fill out the application. Filling out the application incorrectly, though, will lead to severe problems. 

Specifically, for churches, you have to type in particular information and select the right buttons in the application. For example, if you will have a ministry designation, then the IRS would expect you to submit a form called Form 990. If you are a church and not a ministry, churches do not have to submit the Form 990's, but ministries do. If you need assistance with Form 990, please give us a call at 877-494-4655!

Many churches incorrectly obtain their FEIN and then wait several years before applying for their 501(c)(3) status. In these cases, churches receive a revocation letter from the IRS because of a mistake in obtaining the FEIN. This is one of the reasons why it is so essential to obtain your FEIN correctly. 

With our StartRIGHT Service, we will esnure your personal Federal Employer Identification Number is correctly obtained. Schedule a call with a specialist to learn more by clicking the link below!

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Protect Your Calling

While this process of becoming incorporated can be overwhelming, you don't have to do it alone.

The StartCHURCH team truly enjoys helping pastors and ministry leaders like you avoid unnecessary drama and complications when it comes to protecting your organization. Our StartRIGHT Service will provide you with everything you need to become incorporated and preserve your organization.

If you need help with making sure your church or ministry is safe, secure, and legally compliant, give us a call at 877-494-4655!

Today's blog is taken from an episode of the StartCHURCH podcast, Beyond the Call! Every week, we host different guests from across the country that share valuable insight on how to protect what God has given you to lead. Whether you listen while driving in your car or at home with your family, Beyond the Call is a great resource to further your calling as a leader. It is available on Spotify, Itunes, and Google Play.

To subscribe and listen to our podcast, click the link below!

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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