Small oversights can lead to big consequences for faith-based organizations
Regulatory mandates and other paperwork appear to rob time from ministry. But failure to pay attention to details can result in far more serious disruptions.
By Max Herr
Church & Ministry Compliance Consulting
When it comes to operating a house of worship or other nonprofit, the compliance requirements are relatively few. But when you goof, you run the risk of getting into serious trouble with either your state of domicile, the IRS, or both. Sometimes the errors are costly.
THERE’S NO DEBATE: INCORPORATE
The Number One mistake churches and ministries can make is failure to incorporate under state law. While there is no requirement for houses of worship to do this, incorporation provides critical protection for the ministry, its officers, directors, members and assets.
In this same vein, most churches and all nonprofit ministries need to obtain a Determination Letter from the IRS recognizing their nonprofit status and allowing deductible donations to be received. Churches must file the complex Form 1023, while most other nonprofits may be able to file the Form 1023EZ short form. The Form 1023 application fee is $600, and the Form 1023EZ fee is $275. The fees are nonrefundable, so you don’t want to make mistakes in the application. After receiving a Determination Letter, non-church nonprofits will also need to file Form 990 annually. If this filing is ignored for three consecutive years, it will result in automatic revocation of nonprofit status.
RESOLVE NOT TO DISSOLVE
The Number Two error also gets churches and nonprofits in trouble: failure to file the required report of corporate officers. In California, it’s called a Statement of Information. In other states, it might be called the Annual Report. Filing the document is frequently done electronically in a matter of minutes, and if there is an expense, it’s usually nominal. But failure to file in a timely manner can result in the corporation being suspended, or even administratively dissolved (meaning it no longer exists). Someone needs to put this important filing requirement on a calendar and make sure it gets done every one or two years (depending on the state).
NO OUTLAWS ON BYLAWS
Goof Number Three is failure to follow the corporation’s bylaws. Every corporation needs them. If a church isn’t incorporated, it really needs them. What are bylaws? They are the rules of conducting the business of the organization. When you fail to follow them (or your policies and procedures) you can be sued by one of your own members, and that’s going to be costly. Some provisions touch on spiritual aspects of the corporation, such as qualifications to become or remain an active member, requirements for baptism, or church discipline. However, the majority of bylaws govern administrative matters including:
When, where, and how business meetings are conducted.
Who may attend business meetings.
Who may or may not vote on corporation business matters.
Poorly written bylaws often fail to:
Name and/or empower a board of directors (which is always a requirement of state law).
Spell out duties and authorities of the officers.
Define the differences between active and inactive members.
Sometimes bylaws inadvertently misstate the corporate name of the church, fail to identify the “principal place of business” where corporate records are kept, or omit critical provisions concerning the use of nonprofit assets (or what happens to assets if the corporation is dissolved).
Church & Ministry Compliance Consulting is dedicated to helping churches and other nonprofits avoid compliance failures, some of which are state-specific. We assist churches and ministries with:
Creating, revising or modernizing bylaws.
Putting together policies and procedures manuals.
Creating budgets, financial reports and other organizational resources.
We assist with California incorporations and filings and help any church or nonprofit in any state with the Form 1023/1023EZ application.
Max Herr
Max H. Herr, MA, is CEO of Church & Ministry Compliance Consulting.