Church formation in California involves more than defining your purpose and beliefs. To do so correctly and legally, and to avoid potential tax consequences, there are several steps to be taken. Although every situation is different, what follows is a basic approach..
Note: This guide covers church-specific formation issues. If you’re forming a general nonprofit or charity that isn’t a church, see our guide to Forming a Non-Profit for the standard 7-step process, including Attorney General registration requirements that don’t apply to religious corporations.
Legal Structure for Church Formation
Once you have a clearly articulated purpose and beliefs of your church, whether nondenominational or part of a larger organization, the next step in church formation is determining an operational structure.
An Unincorporated Association is generally simple and flexible but offers less liability protection and is generally not eligible for federal tax-exempt status. By far the biggest drawback in conducting business this way is the inability to legally separate the association from its members. This arises from the fact that, by statute, an unincorporated association is liable for its own acts or omissions and for those of its directors, officers, agents, or employees, to the same extent as if the association were a natural person.
A religious nonprofit corporation, by contrast, is a separate legal entity from its members and directors, which limits personal liability. Your church’s governing documents should not only define the purpose for which you are organized, but also set forth the manner in which your organization conducts its business, consistent with that religious nonprofit purpose and able to stand up to scrutiny.
Articles of Incorporation must be prepared and filed with the California Secretary of State that include specific language identifying 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, how they are elected, and their responsibilities.
Once this initial phase of church formation 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 recognized as such.
As stated by 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 and receive tax-exempt status, it remains subject to the California Revenue and Taxation Code (R&TC) as a taxable entity.
Record Keeping for Church Formation
Throughout the church formation 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.
Attorney General Oversight in Church Formation
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, though its power is limited by the California Corporations Code.
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Choosing the Right Business Entity and Entity Formation
Unincorporated Associations
Must a Church Apply for Tax-Exempt Status
Group Exemptions
7 Steps to Forming a Non-Profit
