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General Service Training

Legal Options of Establishing Churches and Ministries
by Rev. D. E. Hickman

The following training article is shared as an opinion belonging to myself. It in no way is meant to be construed as more than an opinion based in the laws and legal structures of this or any Nation. I highly recommend that each minister, church or religious organization seek proper legal advice before deciding how they wish to establish under the laws of their Country or State. I suggest that you read every section of this training article and consider how each section may benefit or limit the function of your organization. Many forms of legal entity may cause your organization unneeded extra expense when first establishing.

Corporation is not always the best form of entity for a church or ministry, contrary to what many will tell you. There are many benefits to incorporation, yet there are also many disadvantages for small limited income groups.

Whether you are Christian based or another religion, Jesus made a statement that may apply to all of us. Give unto Caesar what is Caesar's, give unto God what is God's. It is often less expensive to give Caesar a few tax dollars than to expend monies better used elsewhere in your work.

Some folks will use liability of debts or accident to press incorporation as the only safe choice. Others will point out the without 501(c) 3 status that a church or ministry can not issue a tax-deductible receipt for donations.

For many groups this is irrelevant. Often the donations if any from individuals will be small and deductibility minor. Companies may still be interested in helping your cause if their donation is treated as advertisement spending instead of as a goodwill donation. Advertising carries 100% deductibility for them whereas a donation will seldom be allowed more than 50% deductibility.

In many instances the small church or ministry will use all and more than the donation of a commercial company so that the church or ministry has no income liability. By showing that the certain business helped your organization through your advertising their name can be a win, win situation for both organizations. They help your organization with money or products to aid your charitable projects, you list their name as a major contributor helping the community, and they get the write off while you get the help your organization needs.

All organizations no matter how established should carry liability insurance to protect them selves. In a proprietary organization the principle person is accountable for various liabilities. In the corporation there is limited accountability by the members. Without insurance both can, and have, lost all assets due to legal actions. It has also been proven in several recent cases that the officers of the corporation may still be held accountable for their actions.

In the corporate structure improper accounting can and has caused officers to be arrested and charged for embezzlement of funds. Once a corporation is established all monies in the treasury belong to the entity and not the individual. Using such funds for personal reasons is theft from the corporation and chargeable in all 50 States as a felony. Accounting and proper record keeping is a time consuming must once the organization has incorporated. So it is important that you carefully decide which type of entity will best serve your organization and community as you start to form your organization. Profit verses nonprofit may not be your most important consideration to start with.

I will state once more that this is simply the opinion of myself and each organization should seek professional guidance.

Purpose of establishing a legal Entity

In designing a new religious organization, or transforming an existing one, it is imperative that mutually respectful relationships evolve among the participants. Often the process of choosing the legal organization is the first opportunity a church or ministry has to develop a convivial style of interpersonal relationships. Organization members should be aware that creating formal bylaws and gaining corporate recognition is of a lower level of importance than the group's actual process of self-definition. While debate over structure is occasionally the last act of a group, it is often the debate that is most often remembered in the years to come.

Religious organizations generally arise from a specific idea or philosophy. Members may be seeking an egalitarian, cooperative lifestyle; a self-reliant, back-to-the-land lifestyle; or a contemplative or spiritual lifestyle. They may want to educate or serve others, provide a nice place for a group of friends to worship, or advance a combination of these goals. In any case, once a religious organization arises, attention begins to focus upon what kind of formal, legal organization best suits the church or ministry.

Why should religious organizations be concerned with Legalities?

If it does not have a legal structure, problems can arise with regard to property rights for new members, compensation for departing members, personal liability, holding title to property and assets, or community agreements. Legal structures often provide a solution, or at least a means to resolve problems fairly and equitably.

However, in the United States, the main imperative for organizing formally is taxes. A religious organization must comply with the requirements of the federal Internal Revenue Service and state tax laws. Since there are no legal forms created specifically for religious organizations -- except perhaps 501(C) 3 nonprofit exemption, created for the churches and groups like them, churches or ministries often borrow from the various legal structures used in business organizations. Even though organization members may not see their church or ministry as a "business operation," forming a legal entity derived from the business world offers distinct advantages to an emerging organization.

First, any agreements the group makes as part of its legal structure, such as partnership agreements or corporate bylaws, will be compatible with state law and legally enforceable. Second, using a legal structure such as a partnership or corporation to form a religious organization offers advantages when buying land together. And third, the IRS and state tax officials will tax a religious organization according to the legal form it has taken.

The distinction between religious organizations and other forms of social organization is difficult to define from an inclusive legal perspective. It's like trying to define a religion in the legal sense. It can't be done in a truly descriptive way. Unless you understand the different legal forms of organization, it may seem impossible to come up with a definition of what your religion is or is not. But if you do not do it, then the IRS will.

It is the kind of ownership a religious organization has, as well as how its money is controlled, which will generally determine what kind of legal structure, or combination of structures, it should have. For example, in some religious organizations, each member-household owns their own lot, house, vehicles, tools, and equipment. Little or nothing is owned in common. In other organizations, the land, buildings, and all private property are owned in common, and shared.

In communal religions, the organization owns property in common, but the members also have a common treasury. They contribute all or a portion of their income to the organization, and the organization in turn takes care of all or most of their needs. In still other organizations, the members hold all land, buildings, and other assets in common, through a corporation, with individual members owning individual shares of these joint assets.

Many organizations operate using several legal entities in an interactive fashion. In many "economically diverse" organizations, the land and some buildings and equipment are held in common, while houses, cars, and bank accounts are held privately. The legal structure(s) that best satisfy the needs of one of these organizations may be wrong for another.

As far as possible, the object of choosing a legal structure is not to shape the organization to fit the law, but to fashion legal forms that fit the church, mission or ministry. Sometimes it's easier just to shape the organization.

Legal Options for Communities

Any form of religious organization can be organized under any of the types of organized structures normally recognized by state governments. These include proprietary, simple partnerships, Subchapter S corporations, Limited Liability Companies. limited partnerships, cooperative corporations, and nonprofit corporations. The latter include nonprofit for charitable, religious, or educational purposes; title-holding nonprofit, religious "common treasury" nonprofit, community land trusts, condominium associations and other homeowners associations, and housing co-ops. Economically diverse communities often use more than one of these legal structures in an interactive fashion.

Single Proprietary Organizations

Proprietary means that one person owns and holds complete control of the organization. Many small businesses and religious organizations use this form of entity as a way of establishing when income and membership within the organization is limited. This is the simplest form of legal entity. The costs are usually the least to the owner, and there is often little or no real property involved.

This form of organization usually does not realize tax exemption from the government, but in many cases this does not matter. When the funding is limited and the expenses are close to the income or greater than the income, the regular deductions of a proprietary organization allowed by law will often negate additional taxable income. In this country the business schedule C will determine whether an organization will have to pay additional taxes or have used the income in business deductions.

The Proprietary organization holds the proprietor liable for any expenses, debts, or legal actions against the organization. Members of this organization may not be held accountable for actions taken through the proprietor's actions. Members in these organizations usually do not have authority to create debts, or liabilities to the organization without express permission of the proprietor.

Under Federal law this type of organization may still be a religious organization with most rights of a tax-exempt church, yet without the tax-exempt status. Exemption does not qualify or disqualify your ministry from legal rights of religious freedoms under Federal or All State laws. Some States may require that you submit a doctrine or Articles involving a Statement of Faith of the organization before recognizing the ability of the organization to legally ordain ministers within the group.

In many cases I recommend this form of entity for those wishing to create a church or ministry that have limited resources to begin with. Later it may be beneficial to change the organizational structure to others mentioned in this article.

Partnerships

In this form of legal association, two or more individual proprietors operate a common business. Each partner takes a share of the profits and pays the taxes on that amount, whether it is actually distributed or retained by the business.

The biggest advantage of the partnership form is its simplicity. In most states, the partners aren't required to file any papers with the state; in fact, they can set up their partnership with just an oral agreement or a handshake. (If an organization is formed without any formal legal structures, the IRS and the courts would usually consider the community to be a partnership.)

A second advantage is that while the individual partners' incomes are taxed, the partnership is not itself taxed, unlike corporations, which are subject to "double taxation."

The biggest disadvantage of a partnership can occur if something in the community changes. This is because property rights and compensation of the partners are established by the original Partnership Agreement. If the Agreement is vague or does not anticipate every potential contingency, misunderstandings, disagreement, or other problems can arise if a partner or partners leave, new ones enter, or the Agreement dissolves. A second problem with partnerships is that each partner is personally liable for the partnership's debts. For this reason, the business entrepreneurs of the nineteenth century created the corporation.

Limited Partnerships

This legal structure, which is also not a corporation, allows a business or religious organization to raise money, especially in times when loans are tight or interest rates high.

A limited partnership has "general partners" and "limited partners." The general partners found the organization, assume all the responsibilities and take all the risks. They are personally liable for any lawsuits or debts incurred against the limited partnership. A general partner can be a person, a partnership, or a corporation. There can be one or more general partners.

The limited partners are investors who contribute money (or land or other assets) and take the entrepreneurial risks. They have no say in the day-to-day management of the organization and are protected from liability for the partnership or organization's debts. If the organization fails, the most the limited partners could lose would be their original investment.

Limited partnerships come under state and federal securities regulations, and each state has different requirements to establish limited partnerships. They are usually more complex and costly to set up than other legal structures.

For-Profit Corporations

A corporation is an "artificial person," set up to be a legal entity apart from its owners. Corporations are created by registering and filing "articles of incorporation," with officials of the state in which the business or religious organization is located in. A religious corporation can make contracts, accumulate assets, do business, sue, and be sued in its own name. The owners, or shareholders, decide on the management of the corporation but are not liable for the debts or lawsuits of the corporation. This feature of "limited liability" is the principal advantage of creating a corporation. All organizations regardless of their purpose are taxable entities until they have shown reason to be considered nontaxable. This form of organization may in many cases create an additional burden of taxation if the organization does not immediately meet the requirements of a tax-exempt corporation of religious or charitable entity. The principal disadvantage is double taxation. Corporations are normally taxed on any profits before the profits are distributed to the shareholders as dividends. Then the shareholders may have to pay taxes a second time when they report their dividends as income. Though a religious organization usually does not grant members dividends, the taxability is still in effect for the income of the corporation.

Nonprofit Corporations

Unlike all legal options mentioned so far, which are expected to make money, nonprofit corporations are primarily organized to serve some public benefit, and are not expected to make money. Hence, a nonprofit organization may obtain IRS and state approval for special tax exemption.

Many religious organizations have elected to organize as nonprofit corporations and to apply for tax-exempt status. As with for-profit corporations, a nonprofit corporation is created by registering with the state -- filing a list of corporate officers and articles of incorporation. After receiving state approval, the organization may apply for a federal tax exemption with the IRS.

Of course, some nonprofit religious corporations will not seek federal tax exemption because members view their communities as basic political units, to be operated separately from their spiritual or religious practice. On the other hand, there are organizations with several corporations, some of which might be tax exempt while others are for profit, or nonprofit without tax exemption. A religious organization that seeks this status may not involve itself in politics if it wishes to maintain the tax-exempt status.

For those seeking to form tax-exempt corporations, there are several IRS tax exemptions to choose from. It is best to decide which category of tax exemption you are seeking before filing articles of incorporation, because the articles may have to conform to certain language that the IRS expects before it will grant a particular exemption.

501(c)(3) -- Educational, Charitable, or Religious Corporations

Nonprofit 501(c)(3) corporations must provide educational services to the public, offer charitable services to an indefinite class of people (rather than to specific individuals), combat negative social conditions, or provide a religious service to its members and/or the public. (The IRS interprets "religious" very liberally; this can include self-described spiritual beliefs or practices.) 501(c)(3) nonprofit organization may receive tax-deductible donations from corporations or individuals, and grants from government agencies or private foundations. They are eligible for lower bulk mailing rates, some government loans and benefits, and exemption from most forms of property tax. Religious orders that qualify under 501(c)(3) may also be exempt from Social Security, unemployment, and withholding taxes in some cases.

In order to qualify for recognition as a 501(c)(3), a religious organization must meet most of the fourteen IRS tests. It must be organized, as well as operated, exclusively for one or more of the above tax-exempt purposes. To determine the organizational test, the IRS reviews the nonprofit organization's articles of incorporation and bylaws. To determine its operational test, the IRS conducts an audit of the nonprofit organization's activities in its first years of operation.

Many religious organizations have difficulty passing the operational test because of the requirement that no part of the net earnings may benefit any individual (except as compensation for labor or as a bona fide beneficiary of the charitable purpose). If the primary activity of the organization is to operate businesses for the mutual benefit of the members, it fails this operational test.

Even if the community passes the operational test by virtue of other, more charitable, public benefits -- running an educational center, providing an ambulance service, or making toys for handicapped children, for instance -- it can still be taxed on the profits it makes apart from its strictly charitable activities.

This catch, called unrelated business taxable income, has been a source of disaster and dissolution for many nonprofit organizations because of the associated back taxes and penalties, which can assume massive proportions in just a few years of unreported earnings. Unrelated business taxes prevent tax-exempt nonprofit organizations from unfairly competing with taxable entities, such as for-profit corporations. The IRS determines a nonprofit organization's unrelated business trade income in two ways: the destination of the income and the source.

If a community uses profits from bake sales to build a community fire station (presumably a one-time project related to the community's purpose), the IRS may consider that income "related" and not tax it. If, however, the bake sales expand the general operations of the organization, or pay the electric bill, the IRS may consider that "unrelated" income, and tax it.

A Section 501(c)(3) nonprofit organization may not receive more than 20 percent of the corporate income from passive sources, such as rents or investments. If they are educational in purpose, they may not discriminate on the basis of race and must state that in their organizing documents. 501(c)(3) are not allowed to participate in politics. Such organizations can not back a political campaign, attempt to influence legislation (other than on issues related to the 501(c)(3) category), or publish political "propaganda." If they disband, they may not distribute any residual assets to their members; after payment of debts, all remaining assets must pass intact to a tax-exempt beneficiary -- such as another 501(c)(3).

Conclusion

As you can see from this article there are several ways to start your church, mission or ministry as a viable legal entity. Each organization needs to determine which form suits the group's ideals and proceed from that point. Not making your organization a legal reality can often cause various agencies to deny your legal and religious presence in the community. Being ordained does not automatically mean that others will accept your authority outside of the organization that ordained you. Some States will require that you establish a religious organization local in physical presence before granting the minister authority to perform weddings.

The Universal Ministries ordains you freely as an independent minister of your faith, and in most States this is all you need to perform weddings. This does not make you a ministry or religious organization. It will be up to each minister to decide how strong their calling to serve is, and how far they wish to pursue legal existence as an independent religious organization.

Your organization is not and never will be controlled by the Universal Ministries. Whatever form of presence you establish will be yours and not a company held store as with many mainstream religious organizations. We will help to guide you on your path, yet we will not walk it for you. We will aid you with information and suggestions, but your is the responsibility of establishment and operation of your organization.

Please read this training section several times and use it to help your organization as needed.

Go in faith.


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