We write this as a rebuttal against those advocating the “Free Church” movement; Yes, I am aware of the “Free Church” concerns: Those who express a fear of incorporating the church, and being “501(c)(3).” Essentially, the proponents of the ‘Free Church’ movement argue that by incorporating, we are allowing “Caesar’’ into our church; Or if we take steps to be 501(c)(3) compliant, this will will “give ‘Caesar’ control over the church.”
The primary reason we incorporate, is to protect the people [both the Members and Leadership] from the devastating effects of a civil lawsuit. If, as the result of a lawsuit, a “judgment” is decreed by the court, where financial liability would be assigned to a church member or leader, that liability judgement will endure until every penny is paid, or his death occurs.
There is no law, either state or federal, requiring the church to incorporate, and we are certainly not required to incorporate for the church to be exempt from Federal Taxes. Something very important to understand and remember, is that all the ‘members’ of an unincorporated church will share any issue of liability, and an adverse subsequent judgement – equally! That’s why it’s a very good idea to incorporate, as it gives us an “Umbrella” of liability protection.
Should the IRS ever want to ‘take a look’ at the church records, there is a process they must follow, and there are restrictions on church inquiries and examinations. See the following reprint from the IRS Reg’s.. Please click on: IRS Inquiries and Audit Restrictions
As a church, we are not required to take the steps to qualify for the 501(c)(3). But why in the world would we not choose to do so and, “play their game;” In order to: 1. Not pay taxes on the church’s income; 2. Not pay property taxes on our church’ property; 3. Allow the pastor to receive certain benefits, and pay no tax on a significant portion of his income; AND 4. Enable our church members to reduce their tax obligations, to the degree they contribute even more to the work of the church – for the dissemination of the Gospel of our Lord Jesus Christ?
I think I know all the arguments against “Going 501c3.” But I personally found it most difficult to do what God has called me to do, as opposed to what some think is so important by ‘bucking’ the ‘system.’ Instead, I choose to ‘use’ the system, and I will avoid paying taxes [legally] by understanding the tax laws,and utilizing every provision made available by the IRS regulations and law. I will do what God has called me to do, without having the constant anxiety of wondering when, or if I am about to be ‘nailed’ by the IRS.
I personally came to the point, more that 30 years ago, that my first and primary calling is to propagate the Gospel. I cannot walk in balance, with my mind and concern fixed on both big brother, and the commission the Lord gave me. Yes – we are to be aware of the political climate that affects the church; But not so concerned that we lose our effectiveness in our calling from the Lord.
I am as conservative [in both my theology and politics] as anyone you will ever find! We all know that one day we will have to walk away from any and all church assets in order to freely proclaim the Gospel. But In the meantime, I choose to use the tax ‘system’ as it is written, to keep every penny circulating within the Kingdom of God, to promote our Lord Jesus Christ! And I do not at all feel like I am compromising my principles in doing so.
Some would say they are seriously concerned with the restrictions that nonprofit corporations and federal regulations put on the Church. There is ONLY one restriction that is put on the church by being 501(c)(3). That ONE restriction is, that we cannot speak against [or in favor] of any candidate running for political office, during the election. But that restriction is now being seriously confronted by hundreds of pastors who make it a point to do just that; All speaking out for or against certain political candidates on a predetermined day, and then sending a tape of their sermon to the IRS. Thus far, the IRS has not responded to even one. Incidentally, there is a group of Lawyers standing by ready to make a court fight over it.
We can always freely speak about what “positions” the various candidates have taken on the various issues. OR the candidates political voting record – so long as we talk about ALL the candidates equally. Read the on-line Article I wrote on this subject: What Can Churches Do During An Election?
There is also NO restriction in regards to talking about current issues; We can teach our people what the Bible has to say about those issues. We can talk about; preach about; pay for newspaper advertisements; print placards; hire buses to transport protesters to the front steps of the capitol; and shout to the rooftops in our neighborhoods about ungodly legislation under consideration – - AND SPEND CHURCH MONIES TO DO SO. While the IRS is unwilling to put it in writing, it is generally understood the church can spend 5 to 10 percent of it’s income [assets] on doing just these things. In short we are STILL called to be salt and light in our corner of the world, for we are commanded by the Lord to do so.
By the way, here is a serious question [Still analyzing 'Why' the church should not incorporate]: If a group has expenses inherent to conducting church eg: Rent; Utility bills; Advertising etc. etc., how is the church able to receive and accumulate monies to pay these expenses? One way I guess – is by doing everything “Under the table,” by receiving members contributions, and not receipting them. Remember, to even open a Church Bank Checking Account will necessitate giving the Bank a personal Social Security Number. Whose number? The pastors?. Someone better be keeping good financial records, because in all likelihood, should the IRS ever take look at this church’s finances, it will likely be classified as a “Sole proprietary” endeavor by the pastor. In other words, all church income will be ascribed to the Pastor, and added to his tax return. Hopefully you will have good records that will offset some of that income, with allowable [church] business expenses,
As I said, we are not required to incorporate, but to be exempt of federal tax, we must minimally have By-Laws, and Minutes in our Minute Book, and many states have similar requirements to be exempt from state taxes, as the evidence [documenting] that all business decisions have been conducted according to the By-Laws.
If a church would choose to NOT incorporate, in order to be tax exempt, their By-Laws must contain the four  points as proscribed by the IRS. This church would then be treated as an “Unincorporated Association,” with all the benefits accorded them, that the incorporated church enjoys.
SUMMARY –I see no reason why we shouldn’t use a non-profit corporation to shield us [and our unsuspecting members] from civil lawsuits, any more than using an Umbrella in a pouring down rainstorm;
Please read my On-Line Article What is 501(c)(3)? In this article, you will learn that the church isautomatically 501(c)(3). We do NOT have to go to the IRS and petition [and pay them serious money] for a “Determination Letter,” where they will agree with us, in writing, that we are indeed tax exempt. In some areas, the County Property Tax Assessor might want to see an IRS “Determination letter” before allowing the church property to be removed from the property tax rolls – but normally, the church does not need this letter.
Unless, of course, the purpose of the church leaders applying for a determination letter is that they can then apply for some of that “Free” money the government is offering for social programs. Never forget, with the ‘free monies,’ “Strings” are always attached. This WILL get Big Brother into your church.
The above information is provided as a service to the Body of Christ by ADMINISTRATIVE ASSISTANCE Rev. Don L Buckel Director. 8419 Vista del Cajon Pl. Lakeside, CA. 92040 Don@admin-assist.com
If you would like more information about similar church administration issues, please consider purchasing our Church Administration ‘How To’ Manual, A CD is included with the purchase of this manual This Manual, is endorsed by three CPA’s, an EA and two attorneys, and was updated in January, 2011, for the 12th time, since its original publication in 1991.
Please feel free to call for further dialog on this subject, or any other church admin issue, but do keep the ‘timing’ of any call in mind, as we are on the west coast – San Diego area.
© Copyright 2010 By Administrative Assistance – Rev. Don L. Buckel – Director
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