Establishing a 501(c)(3) Ministry at Church

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Do we need to start a separate tax-exempt entity?

Michael Batts responds in our Ask the Experts discussion.

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501(c)(3), Bookkeeping, Tax, Tax exempt, Unrelated business income tax

Posted:

5/11/2010

Total Reader Responses:

5 [ Read responses | Add your own response ]

Question:
We're looking for funding to help with summer activities for youth, such as day care programs, field trips, community involvement, tutoring, etc. Since we originally included education as a part of our ministry, would these activities fall under the church's bylaws, or do we need to establish a new 501(c)(3) as a separate entity apart from the church? If so, would we need to set up a new corporation, complete with board of directors, bylaws, articles of incorporation, etc.?

Answer:
Churches sometimes form separate 501(c)(3) organizations to carry out certain activities that the church itself would ordinarily be able to conduct. The reasons for doing so are typically based on some practical expedience factor, such as a desire to limit exposure to liability (either way), difficulty in attracting grant funds from grant funders who, by policy or preference, are reluctant to make grants to a church, or for a variety of other practical reasons. Since churches are themselves 501(c)(3) organizations, it is generally true in federal tax law that the activities that may be carried out by such "subsidiary" 501(c)(3) entities are of a type that could be carried out by the church itself, should it choose to do so. The matter of whether a given activity is within the stated mission or purposes of a church is very fact-specific and should be addressed by the church with its legal counsel. In fact, legal counsel should advise the church regarding the potential use of a separate 501(c)(3) entity as well, to address liability insulation and other legal factors. Even if a given activity does not conform to a church's stated mission or purposes, the governing documents of the church may be amended as necessary. This, too, is a matter to be addressed with legal counsel.

Joy Skegstadt, contributing advisor for the Church Management Resources team of Christianity Today International, has an excellent article on ChurchBuyersGuide.com titled "The Case for Nonprofits." Joy is a speaker and consultant on nonprofit management and ministry development. She also is the author of Starting A Nonprofit At Your Church (Alban Institute, 2002), a book outlining the steps involved in forming a separate nonprofit, and Winning Grants to Strengthen Your Ministry (Alban Institute, 2007).

Posted: October 25, 2010

Apostle

(Guest)

Is it legal for a 501C3 entity to umbrella an entity with similar purposes, incorporated in a different state, that has it's EIN with an address in a different state? And what is the paper process?

Posted: August 09, 2010

Michael Batts

(Guest)

Under federal tax law, churches are exempt under Section 501(c)(3) without having a determination letter from the IRS. You may voluntarily file Form 1023 and request an IRS determination letter if you believe it is advantageous to do so. If you do wish to file Form 1023, a good CPA familiar with church tax law can help you with that. Depending on the nature of your attorney’s practice, your attorney might also be able to assist with the 1023. You also need to evaluate tax compliance issues in other areas like payroll tax, sales tax, property tax and the like. The CPA can definitely help you there. An essential reference tool in this area is the Church and Clergy Tax Guide by Richard Hammar (find it at YourChurchResources.com). You would also benefit from reading IRS Publications 15, 557 and 1828. The IRS has a training website at www.stayexempt.org that can also be of help.

Posted: August 09, 2010

Michael Batts

(Guest)

First, you should retain legal counsel familiar with nonprofit (ideally, church) organizations in your state to assist you in forming a corporation in which to operate the church. The attorney should ensure that all IRS-required language is included in the articles of incorporation filed with your state. (For information about the required language, see IRS Publication 557.) The attorney will also assist you in drafting bylaws that conform to your church’s model of governance. As part of the process, your attorney will ordinarily assist you in obtaining a federal employer identification number (EIN) from the IRS. Once you have your corporation formed and your EIN, you may open a bank account and begin transacting business in the name of your new church. Continued...

Posted: August 09, 2010

Research Team

(Guest)

We have been a mission of a larger church for over 15 yrs, under their "umbrella" (their tax ID and 501(c)3, etc), but now want to go autonomous. Not sure what to do first, obtain Tax ID#, file for a 501(c)3, move our funds to our own banking account. Need some advice. Thank You.

Posted: June 01, 2010

Christian Louboutin

(Guest)

A good article Thank you!

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