Fundamentals of Church Legal Formation
One of the most important steps in starting a church is understanding whether or not it should pursue legal recognition. While legally recognized churches are not required to meet IRS guidelines, in the eyes of the IRS and other government entities, a non-recognized church has the same status as a religious social organization. The recognition of church status is important however for reasons other than tax exemption . A legally recognized church has access to the same benefits that secular nonprofits have, such as exemption from sales tax, free mail delivery, and the ability to apply for grants and other funding available to charities. Legal recognition can also be beneficial in establishing standing to participate in government meetings. Additionally organizations that are not legally recognized may be less appealing to potential donors who may be concerned about the legitimacy of a church that appears to be operating illegally.
Research and Follow State Requirements
A church must also comply with state law. These state requirements may be time-consuming, but they are essential to the formation of a legally-functioning church organization. If the church fails to educate itself and comply with state requirements, it risks its legal right to operate as a church. Some state requirements for forming a 501(c)(3) organization include filing Articles of Incorporation with the Secretary of State and applying for state income tax exemption. Your state may also require the organization to apply for certain licenses in order to conduct business in that state. Since these requirements differ from state to state, it is imperative that you perform thorough research to find out what your state requires.
Create a Constitution for Your Church
The constitution for a church is an essential governance document. It serves as the blue print for how your church will be run. Most importantly, it is essential for legal purposes.
A sample church constitution and bylaws is available on the Attorney’s Church Law Blog and can be a helpful resource in drafting your constitution and bylaws.
It’s important to note that your church constitution and bylaws should be developed based on the needs of your church and the state law requirements applicable to your church. The document should avoid legal jargon and boilerplate language. There are some general guidelines and recommendations.
First, the document should contain a statement of purpose or mission. For example, "Our mission is to provide others with the opportunity to develop and grow their relationship with Jesus Christ."
Second, your church constitution should identify the members of your church. For example, who is a member? What are the requirements for membership? Do you have different levels of membership?
Third, the constitution should identify the officers and members of the board of directors. Who are the officers of the church? Who will supervise the staff persons? What is the authority of the board of directors?
Fourth, identify the process for electing or appointing church officers. How do you propose to elect those in control of the church? Identify the elections procedures.
Fifth, it’s important to identify the process for amending the church bylaws or constitution. Will amendments be made by majority vote? Will a super-majority (67% or more) be required?
Finally, you do not want your church officers to appoint themselves to the board of directors. This is a blatant conflict of interest. Make sure to include restrictions on self-appointments.
Incorporate Your Church
The next step in forming a church is to incorporate with the state. Most states allow the formation of a not-for-profit corporation for this purpose. Not-for-profit corporations are usually quite cheap to incorporate and have very low costs in terms of ongoing maintenance.
Many churches incorporate under a name that is similar to their "doing business as" name, or "DBA." A DBA is a fictitious name that the church will use until it has been officially incorporated, and is the name that the public will know the church by until the name becomes official. For example, ABC Church may choose to call itself "ABC" until it becomes official. If someone asks for the legal name of the church, the church can simply refer the individual to the DBA name. With regard to the State corporation register, ABC Church is named "XYZ Inc." until it changes its name to ABC. This can be done at the time of incorporation, or any time thereafter, since amending a corporation’s name is also very inexpensive.
Apply for Tax Exempt Status for Your Church
But merely forming a nonprofit corporation is not enough to qualify as a church or other type of tax-exempt organization under federal law. Rather, the law requires that you also apply, pursuant to the terms of the Internal Revenue Code, to be recognized as a charitable organization, which in most instances requires obtaining a federal tax-exempt status, i.e. 501(c)(3) status. Your new church must apply for and be granted 501(c)(3) tax-exempt status to be exempt from federal taxes and designated by the Internal Revenue Service as a qualified charity to whom donors can contribute and their contributions will generally be deductible from their federal taxes. Generally , to obtain federal tax-exempt status, the church must establish that it is organized and operated exclusively as a religious institution and not for the private benefit of any individual. To properly prepare your application, you will need Form 1023 (Application for Recognition of Exemption), the instructions for the Form 1023, the appropriate user fee and the required organizational documents, including articles of incorporation and bylaws.
Write Bylaws for Your Church
Bylaws are your church’s "governing documents" and are probably the most important organizational document you will have. They set forth the structure and rules by which your church will operate and provide the framework for continuing operations when you are faced with changes such as a pastor leaving the church. Bylaws can also provide guidelines for such things as how often the church must meet, how the church’s assets are to be distributed if the church is dissolved, and the process for adding or removing members.
Bylaws must be consistent with applicable laws and have been filed with the state in which you are organized. However, there is considerable variation between states in terms of the specific requirements for bylaws. In addition, even though most states have statutes that set forth minimum requirements for corporate bylaws, some states do not require organizations to adopt bylaws. If your state’s statutes do require bylaws, your church must adopt them to survive. To ensure that your bylaws are compliant with applicable laws, particularly if you are in a state that requires bylaws, it is best to have an attorney draft the bylaws or at least review them before filing the completed application.
A basic set of bylaws is typically 10-15 pages long and includes the following provisions: In addition, the bylaws will include an appendix that is signed by all of the incorporators who sign the Articles of Incorporation. This appendix simply provides the signatures of the incorporators of the church. Remember, bylaws are only binding on the members and the church. Third parties are only bound to the extent the corporate status of the church limits their exposure to liabilities. Municipalities are generally free to impose regulations pursuant to their own independent judgment and without regard to the church’s corporate form.
Set up Simple Financial System
The next important step addresses the establishment of an adequate financial system for the new church. This system should ensure transparency and ministry accountability, and should account for the tax-exempt status of the new congregation, as well as provide adequate recordkeeping that will be invaluable when it comes time to file taxes. Banks require churches to open bank accounts solely in the name of the church. Some banks allow for dual signatures for checks issued on those accounts; however, many banks require all checks to carry three signatures. Church governing boards should consider whether they want dual signers or all three. Having more than one authorized signer can avoid disputes over checks issued on behalf of the church.
The new church will need to adopt an adequate system of accounting. Examples of some accounting software packages that have been tried and tested in church settings include Quickbooks and Quicken. Lesser known accounting packages include: The City Church Management Software with a full range of accounting capabilities, PowerChurch which offers invoice payment through the internet, and Church Partner which is a full-featured church membership, contribution, accounting and event management program. Many of these programs will enable the church to keep track of debit and credit transactions for both church accounts and individual church members. Keeping good accounting records ensures that the church accurately reports its income for income tax purposes, when exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code.
Obtain Property and Permits
The next logical step in your church plant journey will be to acquire some property and possibly build a site to hold services. Acquiring a property is relatively straightforward with a few legal considerations and obtaining the necessary permits can be a straightforward process with a little bit of forward planning.
The most important consideration when acquiring property relates to liability issues. Most likely, you are looking to purchase or lease property, however, regardless of whether you are renting or buying, you will want the property owner to carry liability insurance, fire insurance and title insurance on the property. If the property owner is leasing the property to your church, these insurance policies may be part of the property rental file . If you are purchasing the property you will want to add obtaining these types of insurance policies as part of your negotiating process.
Depending on how large your congregation is expected to be, you may require occupancy permits from the city. Depending on the city, you may also require building permits for the construction process and, depending on your line of employment, you may or may not need a business license. Trying to navigate all the local laws can be a little tricky. Some large cities have a center where you can go and get all the information you need in one place. Any other considerations will depend on your particular circumstances.