What Type of Business Entity is Right for your Church?
Although this article will focus on the formation of a corporation, it is important to understand all the different types of business entities and how they will affect your church.
An association is formed once two or more individuals mutually agree to act for a common lawful purpose, whether for profit or not. An unincorporated association can act and conduct business in the same manner as the other entities listed below, including holding ownership of real property. However, what such an association cannot do is legally separate itself from its members. As discussed below, the individual members of the association may be personally liable for its debts and liabilities of the whole. Regardless of whether or not a member of an association consents to a rental agreement for example, when those individuals enjoy the benefits of that contract, by attending services at that location, they may be personally liable for the rent payments under its terms.Much like other entities, an unincorporated association may adopt rules for its own internal management, such as bylaws, constitution, or articles of association. In addition, the tax-exemption available to religious corporations under the Internal Revenue Codes are usually available to most unincorporated associations that meet all of the conditions for exempt status. In California, an unincorporated association is nonprofit if its creating document contains the necessary nonprofit language.
In California, an unincorporated association should file a statement with the Secretary of State indicating the location of its principal office and its designated agent for service of process. In addition, all unincorporated associations, even if organized on a nonprofit basis, are subject to California income tax, until the California Franchise Tax Board grants tax-exempt status.
Entity Type: Limited Liability Company
A LLC is a relatively young form of business which has some advantages over corporations and partnerships. The primary advantage over a partnership is that, like the owners (shareholders) of a for profit corporation, the liability of the owners (members) of an LLC for the obligations of the LLC is limited to their financial investment. However, as with a partnership, members of an LLC have the right to participate in management of the LLC, unless the LLC’s documents provide otherwise.For California income tax purposes, an LLC with at least two members will be classified as a partnership. To be taxed as a corporation, the LLC must make such an election with the Internal Revenue Service.
Entity Type: Corporation
A corporation is a legal entity created under State law which requires filing certain documents with the California Secretary of State. A for profit corporation involves owners (shareholders), who are generally not personally liable for the obligations of the corporation, but as implied, are organized for the purpose of making a profit. However, the nonprofit corporation does not have “owners.” Since, the corporation is formed for the purpose of providing some religious or public benefit, it is “owned” by its members/stakeholders. As nonfinancial “owners” of the corporation, the members are not financially responsible for the obligations of the nonprofit corporation. The only exception to that been the officers and directors under limited circumstances, (see Church Officer and Director Liability, as found on this site).One of the benefits of a nonprofit corporation is the organization is not required to pay taxes on the money the organization receives related to its exempt activities. The other primary benefit is that of a limited property tax exemption. In addition, the members who donate funds to the organization may also enjoy the benefit of a personal tax deduction, provided the church is a registered 501(c)(3) in good standing.
Entity Type: Nonprofit Corporation
The process of creating a tax-exempt, nonprofit corporation is rather complex and requires not only time and money, but also an understanding of both the legality and taxation issues. In addition to forming the corporation with the Secretary of State, the corporation must then also apply for tax-exempt status with both the State and IRS.In brief, the group of likeminded individuals would have to agree upon the purpose for which they are legally organizing themselves as a corporation, followed by the filing of its charter documents, or articles of incorporation with the State. Although there are several necessary elements to the articles, the most important would be stating the specific purpose for which the corporation is organized.
Once incorporated, a meeting of the board of directors must be called in order to. At the first such meeting adopt bylaws, often referred to as a constitution. This document must be consistent with the articles of incorporation in how it defines the rules and procedures under which the corporation will operate. The bylaws may be voluminous and include such topics as the: 1) qualifications for membership; 2) member classifications; 3) manner of admission, withdrawal, suspension, and expulsion of members; 4) voting rights and privileges of members; 5) appointment or election, duties, compensation, and tenure of officers; 6) number, qualifications, manner of election, powers, and duties of directors; and 7) numbers required to establish a quorum for meetings of members, committees, and the board. Thereafter, annual meetings must be held, and the California Secretary of State’s Office notified who the current officers and director are.
Once properly organized under the California Secretary of State. and the necessary documents adopted, the nonprofit corporation would than make application with both the California Franchise Tax Board and the Internal Revenue Service in order to be officially granted tax-exempt status.
Although obtaining tax-exempt status is beyond the scope of this article, it is important to note that although an organization may be exempt from federal income tax, it is not automatically exempt from California tax. California tax-exempt status must be applied for separately, and in addition to federal tax exemption.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.