Step 4: Incorporate your nonprofit with the state
To officially form your religious corporation or nonprofit corporation, you must file Articles of Incorporation or a similar document with the state. In some states, organizations with the specific purpose of holding religious worship services, such as a church, synagogue, mosque or other house of worship, the Articles of Incorporation are filed with the county in which the house of worship will be physically located.
While the process of establishing a House of Worship and a nonprofit with another religious purpose are similar, there are some key differences between these organizations. Most importantly, Houses of Worship are exempt from filing the annual Form 990 informational tax return, which most other nonprofits, including those with other religious purposes, are required to file.
Incorporation requirements vary from jurisdiction to jurisdiction. Sample requirements may include:
- Submitting a certificate of disclosure.
- Appointing a registered agent.
- Submitting an initial directors list.
There is also specific language that the IRS requires to be included in the Articles of Incorporation. This language includes limitations on the organization’s purpose, personal benefit to directors, and procedures upon dissolution.
You must also establish the bylaws that outline how your nonprofit organization will be run.
Some states require that information from the Articles of Incorporation be published in a local newspaper multiple times, followed by the filing of proof of publication with a state agency.
Step 5: Hold an organizational meeting
After establishing your religious corporation or nonprofit corporation, you’ll need to conduct an organizational meeting to approve key business items necessary for starting operations. This meeting, commonly known as the organizational meeting of the corporation, can be held by either the board of directors or the incorporators – those who signed and filed the articles on behalf of the corporation.
During this meeting, you must perform and note the following actions:
- Set the tax year and accounting period.
- If you operate a membership nonprofit, directors or incorporators must approve the issuance of membership and membership certificates and, if applicable, establish and schedule membership dues or assessments.
- Authorize and form the board and other committees.
- Appoint officers.
- Approve the bylaws.
- Authorize the nonprofit to apply for tax-exempt status or confirm the effective date and terms if it has already been obtained.
- Approve initial transactions, like opening a corporate bank account.
- Create a conflict of interest policy*
*Note: A clear conflict of interest policy is essential for decision-making that is unbiased and aligns with your nonprofit’s mission. Transparency and monitoring conflicts builds trust and showcases your commitment to ethical practices. Adoption of a conflict of interest policy is an IRS requirement for qualification for 501(c)(3) status.
Additionally, IRS Form 990 requires a written conflict of interest policy, along with details on how conflicts are managed and how potential conflicts among board members are identified.
Some state laws also specify what must be included in a nonprofit conflict of interest policy and how conflicts should be addressed.
Step 6: Obtain an Employer Identification Number (EIN)
A federal Employer Identification Number (EIN) is a unique identification number issued by the IRS for businesses. It is also known as a FEIN or federal tax ID number. Corporations, including religious corporations and nonprofit corporations, must obtain an EIN, regardless of their plans to hire employees.
The EIN is needed for tax filings and other crucial business functions, such as opening a business bank account, securing a loan, or processing invoices.
Step 7: Apply for 501(c)(3) tax-exempt status
Like all nonprofits, religious organizations can obtain federal 501(c)(3) tax status. This allows your organization to avoid corporate tax and accept tax-deductible donations. However, the IRS does impose restrictions on 501(c)(3) nonprofits, including limits on lobbying and the use of profits.
Houses of worship that qualify under section 501(c)(3) are automatically tax-exempt and don't need to apply for IRS recognition. However, many choose to seek this recognition to assure leaders, members, and donors of their tax-exempt status. Securing recognition of 501(c)(3) status is often needed to qualify for other benefits and exemptions.
If an organization incorrectly claims to be a church and the IRS disputes this fact, it may be required to pay corporate income tax, and contributions made may not be tax-deductible, creating issues for donors.
The process for achieving tax-exempt status can be lengthy, so plan ahead.
FAQs about forming a nonprofit religious organization
Q. What is the difference between a church and a nonprofit corporation with a religious purpose other than operating a house of worship?
A. For federal tax purposes, a church is defined as any officially recognized place of worship – including synagogues, mosques, and temples – irrespective of the religious beliefs or faith of its followers. The IRS automatically classifies churches as 501(c)(3) charitable organizations if they satisfy certain requirements set by the agency.
Rather than offering a single definition applicable in all situations, the IRS identifies churches based on a set of characteristics. Some of the traits the IRS considers when assessing whether an organization qualifies as a church include:
- Ordained ministers
- Distinct religious history
- Recognized creed and form of worship
- Regular congregations and religious services
- Established places of worship
- Established schools for youth and members
It's important to note that churches are still subject to the same standards as other 501(c)(3) charitable organizations, despite not being required to officially register their tax-exempt status. On the other hand, if your organization operates as a homeless shelter that employs ordained ministers but lacks a place of worship or conducts religious services, it is unlikely to be classified as a church.
Q. What is incorporation?
A. Incorporation refers to the legal procedure for establishing a corporate entity or company. The corporation that results from this process is a distinct legal entity, which separates the business's assets and earnings from those of its owners and investors.
Q. What are the reasons for incorporating a religious corporation or a nonprofit corporation?
A. Some of the advantages of forming your religious organization as a nonprofit corporation include the following:
- Limited personal liability: One of the primary benefits of establishing a nonprofit corporation is that it shields directors and members from personal liability regarding any financial obligations or legal issues of the nonprofit. This concept is known as limited liability. While it's rare to find yourself in a situation where you need this protection, it remains the most crucial aspect of operating as a corporation.
- Allows the religious organization to act as a legal entity: When a religious organization is incorporated, it gains the ability to borrow, possess, or transfer property under its own name. Additionally, an incorporated organization can enter into contracts without requiring personal guarantees from its leaders.
- Access to grants: Certain nonprofit organizations qualify for both public and private grants, which helps them secure operating funds more easily. For example, specific grants and public funding sources are exclusively accessible to 501(c)(3) organizations.
- Tax-deductible donations: when a religious corporation is formed donations made by individuals to the corporation are automatically tax deductible. When a nonprofit corporation is formed, the entity does not have tax exempt status until it has submitted Form 1023 to the IRS and has been issued a determination letter confirming the organization’s tax exempt status.
- Enhanced credibility: Incorporation provides a more formal and established legal framework, which can enhance the organization’s credibility. Additionally, it indicates a dedication to a lasting presence, as the organization remains a legal entity even with changes in its initial leadership.
- Helps establish clear governance: An incorporated religious nonprofit can conduct transactions through its board, whether obtaining a loan or signing legal documents.
Learn more
Vcorp can guide you through the process of incorporating your nonprofit.
Contact Vcorp today for more information.
Related resources:
Application for Exemption
Nonprofit Formations
State Tax Exemption
Charitable Solicitation Registrations
