Making My Church a Legal Entity

[revandrew]

Hey everyone,

I am in the early process of establishing my Church, and I have a few questions. Firstly, I understand that Churches are exempt from taxation automatically, and are not required to file a form 1023 to receive this exemption (IRS Publication 557).

1) Does this refer only to incorporated Churches, or can Churches established in a similar manner as a secular sole proprietorship be included in the exemption?

2) I found a website which states that incorporation is not required to receive tax-exemption, and it says you can file establish as a sole-proprietorship. How accurate is this statement?

3) What is required to make my Church a legal entity? (I do not want to incorporate unless absolutely necessary)

I was told my the Circuit Court clerk and by the Commissioner of the Revenue that I need to speak with an attorney, but I cannot afford consultation at this time. I am hoping that I may begin with some answers here. Thank you.

 

[Michael Wechsler]

I have not incorporated a Church but, if it were me, I would create a separate fictional entity that would protect me from personal liability. That vehicle is creating a corporation. Virtually any other form might subject you to personal liability even though the business is a legal entity.

Directly from the top of Form 1023 you get many questions answered:

Overview of Section 501(c)(3) Organizations Who Is Eligible for Section 501(c)(3) Status?

Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals are eligible to file Form 1023 to obtain recognition of exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code. Form 1023 not necessary. The following types of organizations may be considered tax exempt under section 501(c)(3) even if they do not file Form 1023.
• Churches, including synagogues, temples, and mosques.
• Integrated auxiliaries of churches and conventions or associations of churches.
• Any organization that has gross receipts in each taxable year of normally not more than $5,000.

Even though the above organizations are not required to file Form 1023 to be tax exempt, these organizations may choose to file Form 1023 in order to receive a determination letter that recognizes their section 501(c)(3) status and specifies whether contributions to them are tax deductible. Qualification of a Section 501(c)(3) Organization There are two key requirements for an organization to be exempt from federal income tax under section 501(c)(3). A 501(c)(3) organization must be organized and operated exclusively for one or more exempt purposes. Organized. An organization must be organized as a corporation (including a limited liability company), trust, or unincorporated association. The organizing document (articles of incorporation if you are a corporation, articles of organization if you are a limited liability company, articles of association or constitution if you are an association, or trust agreement or declaration of trust if you are a trust) must limit the organization's purpose(s) and permanently dedicate its assets to
exempt purposes. Operated. An organization must be operated to further one or more of the exempt purposes stated in its organizing document. Certain other activities are prohibited or restricted, including, but not limited to, the following activities.

A 501(c)(3) organization must: a. Absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office.
b. Absolutely ensure that its assets and earnings do not unjustly enrich board members, officers, key management employees, or other insiders.
c. Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially.
d. Not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose(s).
e. Not engage in activities that are illegal or violate fundamental public policy. f. Restrict its legislative activities. Legislative activity. An organization does not qualify for section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation. Form 5768. Most public charities are eligible to elect to make expenditures to influence legislation by filing

Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To
Make Expenditures To Influence Legislation.

By filing Form 5768, an eligible organization's legislative activities will be measured solely by an expenditure limit rather than by the "no substantial amount" limit. For additional information on the expenditure limit or the no substantial amount limit, see Publication 557, Tax-Exempt Status for Your Organization. For this purpose, "legislation" includes action by Congress, a state legislature, a local council, or a similar governing body, with respect to acts, bills, resolutions or similar items (such as legislative confirmation of appointive offices). Legislation also includes action by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure. Legislation generally does not include actions by executive, judicial, or administrative bodies. Organizations may involve themselves in issues of public policy without being engaged in legislative activity. For example, organizations may conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues. Similarly, an organization may appear before a governmental body to offer testimony about a decision that may affect the organization's existence. A private foundation is not allowed to influence legislation.

Political campaign intervention. All 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for elective public office. Non-partisan voter education activities (including public forums and voter education guides) are permitted.
Similarly, non-partisan activities to encourage people to participate in the
electoral process, such as voter registration and get-out-the-vote drives, are not prohibited political campaign activity. However, voter education or registration activities that (a) favor one candidate over another, (b) oppose a candidate in some manner, or (c) favor a group of candidates, are prohibited. Public Charities and Private Foundations Every organization that qualifies for tax-exempt status under section 501(c)(3) is further classified as either a public charity or a private foundation. For some organizations, the primary distinction between a public charity and a private foundation is an organization's source of financial support. A public charity has a broad base of support, while a private foundation receives its support from a small number of donors. This classification is important because different tax rules apply to the operations of each entity.

Deductibility of contributions to a private foundation is more limited than contributions to a public charity. See Publication 526, Charitable Contributions, for more information on the deductibility of contributions. In addition, private foundations are subject to excise taxes that are not imposed on public charities.