I get this question quite a lot, and so I thought I’d answer in a post, as there are probably a lot of people who could benefit from the answer.
I’m planning to start a new church. How do I get 501(c)(3) status? Should I incorporate?
What if we don’t incorporate?
Like most states (but probably not all states), Alabama has evolved an approach to churches designed to avoid First Amendment issues. Alabama treats unincorporated churches as having two existences, a secular existence and a spiritual existence.
For purely secular purposes, the church property is considered as held in trust by the leadership of the church. This empowers the leadership to buy and sell, write checks — that sort of thing — while keeping the government out of the church’s internal affairs. For First Amendment reasons, courts will rarely intervene in internal disputes.
Spiritual issues are decided by the church based on its own internal rules. The courts avoid getting involved in internal church fights wherever possible, simply referring the disputants to the church’s bylaws or other internal rules.
This structure also avoids the old common law rule that the members of an unincorporated association are personally liable for all association debts — both bank loans and tort liabilities. Many states, including Alabama, have adopted statutes providing that members of unincorporated associations are not liable for association debts, but these are fairly recent laws and not every state has one.
In short, if you don’t incorporate, you probably do not suffer personal liability. Moreover, if you have bylaws or other clear rules for how decisions are to be made, the courts will largely respect those rules.
In larger Churches of Christ, the elders have ultimate authority under Church of Christ polity. In Churches of Christ without elders, it’s normally the baptized males who get to decide, although more and more congregations are allowing women to participate in decision making. But that’s a local decision, not a decision for the courts.
Under IRS guidelines, the church is automatically a 501(c)(3) organization (exempt from paying taxes and able to receive deductible contributions) if its organizational documents meet IRS standards. It takes a certain level of expertise to write good documents that meet IRS rules (the rules were easier to meet pre-1958), but it’s not hard.
It’s not necessary to file for a ruling that you are a 501(c)(3) organization (exempt from taxation and able to accept tax deductible contributions), although it’s often prudent to do so, because many grant-writing organizations require a ruling. And it often helps in dealing with various governmental agencies. With few exceptions, charities other than churches have to file for a ruling or they do not qualify.
Why incorporating is probably a good idea
First, not every state has a law shielding the members from personal liability.
Second, if you ever want to own real estate, the title company will insist on it, as the ability to buy and mortgage land is usually unclear for unincorporated associations.
Third, corporations have clear rules. You may not like the rules, but at least your questions have an answer. On the other hand, the courts sometimes treat the spiritual part of a church as distinct from the incorporated part. Thus, there was a case out of Arkansas where the deacons sued the elders for an accounting for the church’s finances. The state nonprofit corporation law plainly allowed the members to force disclosure of corporate finances.
But the court held that the finances were part of the spiritual side of the church, untouchable by the state under the First Amendment. Therefore, they refused to enforce the statute. So incorporating does not necessarily produce the expected results.
Fourth, the IRS readily accepts nonprofit corporations as 501(c)(3) organizations. An unincorporated association may have trouble obtaining recognition.
What’s the best way to incorporate?
I’m not a fan of incorporating churches under the general nonprofit corporation act of a given state. Those laws often require a level of formality and impose rules that are foreign to Church of Christ practice. Very few Churches of Christ have bylaws. Very few have very specific rules even for who is a member. And a certain amount of gray can be very helpful and reflective of reality.
If you have to specify a rule for when someone ceases to be a member (and so can no longer vote) or who can qualify to be an elder, the church freezes its understanding of the Bible in time, and yet most churches have an evolving, ever-changing understanding.
I’ve seen some churches have knock down, drag out fights over the church’s bylaws. Blessedly, I’ve never seen such a fight in the Churches of Christ. We have our flaws, but that’s one fight we don’t have to contend with.
In Alabama, there’s a special statute designed just for churches that I like to use. It doesn’t say much other than that you’re incorporated and it gives a process by which you can mortgage and sell real estate. The rest you have to write into the charter.
The most common mistake is for the lawyer to list the “trustees” of the church in the charter without creating a mechanism for replacing trustees. Worse yet, the trustees are sometimes not the elders, and so there have occasionally been battles between the elders and the trustees named in the charter.
Good drafting would be to name those persons who are from time to time elders of the church as the trustees, so that the trustees and elders are always the very same people.
The second most common mistake is to forget to put the language the IRS requires in the charter (see IRS Publication 557). This is required even if you don’t intend to apply for an IRS determination of 501(c)(3) status.
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