Forming a church in California involves more than defining your purpose and beliefs. To so do correctly and legally to avoid potential tax consequences, there are several steps to be taken. Although every situation is different, what follows is a basic approach.
Legal Structure:
Once you have a clearly articulated purpose and beliefs of your church, whether nondenominational or part of a larger organization, you must determine an operational structure.
An Unincorporated Association is generally simple and flexible but offers less liability protection and are generally not eligible for federal tax-exempt status. By far the biggest drawback in conducting business in this manner is the inability to legally separate itself from its members. This arises from the fact that by statute, an unincorporated association is liable for its act or omission and the act or omission of its director, officer, agent, or employee, acting within the scope of the office, agency, or employment, to the same extent as if the association were a natural person. While not required by law, it’s highly advisable to have a written agreement among the members. This agreement, sometimes called the “constitution” or “bylaws,” should outline the internal rules and procedures of the association. Include details such as membership requirements, meeting schedules, decision-making processes, and dissolution procedures.
A Corporation provides liability protection for members and allows for tax-exempt status, but is much more involved. The governing documents are very important and must be drafted carefully to not only define the purpose for which you are organized, but also set forth the manner in which your organization conducts its business in a manner that is consistent with that religious nonprofit purpose that stands up to scrutiny.
Articles of Incorporation must be prepared and filed with the California Secretary of State that include specific language that identifies the corporation as a religious organization. Additionally, Bylaws will be developed that outline the internal rules and procedures of your religious corporation. This document typically covers matters such as membership, meetings, and the powers and responsibilities of the board of directors. Your Bylaws will identify how to appoint the initial board of directors, the number and qualifications of directors, and how they are elected, and their responsibilities.
Once this initial process has been completed, it is time to acquire an Employer Identification Number from the IRS, open bank accounts, and secure recognition as a tax-exempt organization. Unlike the automatic qualification under the IRS Code, religious organizations that desire tax-exempt status in California must apply for and be recolonized as such.
As per the State Franchise Tax Board, although most California laws deal with tax exemption patterned after the Internal Revenue Code, obtaining state tax-exempt status is a separate process from obtaining federal tax exemption. If a religious organization fails to apply for a receive tax-exempt status, it remains subject to the California Revenue and Taxation Code (R&TC) as a taxable entity.
Record Keeping:
Through this entire process and thereafter, it is vitally important that you maintain accurate and complete record-keeping. In addition to the IRS, make sure you comply with all state and local laws, including business licenses and permits. Note any deadlines for annual or bi-annual filing dates to maintain compliance. Reconcile your bank accounts monthly to catch inaccuracies before they become a problem. Stay informed about legal and regulatory requirements for churches and nonprofits in California to ensure ongoing compliance.
Note:
Religious corporations classified as such by the Secretary of State are automatically exempted from registration and not required to register or file annual reports with the Attorney General’s Registry of Charitable Trusts. However, the Attorney General does maintain oversight over religious organizations, but its power is limited by the California Corporations Code.
Please see our other related articles
Choosing the Right Business Entity and Entity Formation
Unincorporated Associations
Must a Church Apply for Tax-Exempt Status
Group Exemptions
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 services. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
