| The Issue | | Tax-exempt Corporations | | Free Churches |
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| What kinds of leaders will a church have? | | Corporation rules vary throughout the 50 states, but most must have a president, secretary, treasurer and a board of directors. One person can hold multiple offices. These are the offices that have power in the corporation. Biblically recognized leaders do not have any decision-making power in an incorporated church unless they also hold a corporate office. | | "It was he who gave some to be apostles, some to be prophets, some to be evangelists, and some to be pastors and teachers, to prepare God's people for works of service, so that the body of Christ may be built up" (Ephesians 4:11–12).
"The elders who direct the affairs of the church well are worthy of double honor, especially those whose work is preaching and teaching" (1Timothy 5:17). |
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| Can the state tell church what to teach? | | Internal Revenue Service Code sec. 501(c)3 says:
"List of exempt organizations -
(3) Corporations... organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes… no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. " Nearly all church corporations include these very words in their corporate documents—they have agreed not to be involved in anything that the IRS decides is political. They also agree not to "carry on propaganda". See meaning at right: | | Many Old Testament prophets spoke against the political leaders of their day. So did John the Baptist (Matthew 14:3-4), Jesus (Matthew 23; Mark 8:5) and the Apostle Paul (Acts 24:25). When the state told the Church what to teach, this happened: "‘We gave you strict orders not to teach in this name,' he said. ‘Yet you have filled Jerusalem with your teaching and are determined to make us guilty of this man's blood.' Peter and the other apostles replied: ‘We must obey God rather than men!'" (Acts 5:27-28). The New Testament Church followed Christ, not the state. Today, if we do not promise obedience to the state in corporate documents, we can still follow Christ. It is possible that the state may someday persecute free churches, but it will be persecution for righteousness' sake, not persecution for making corporate promises to the state that we do not intend to keep. |
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| Can the state tell a church what to do? | | When a church is incorporated, it must follow thousands of regulations for corporations—even if they bankrupt the church. For example, a zoning ordinance may require buildings to have one parking spot for every four chairs inside. They may try to enforce this even if a church has three sets of chairs for everyone who attends (worship hall, fellowship hall and classrooms) or if most of its members are brought in by bus. Does God want a church to buy land for unneeded parking spaces and not have enough to support its missionaries? | | While most free churches try to cooperate with reasonable requests of governments and neighbors, they have been quite successful at avoiding regulations like the one described at left. One city attempted to get a church to add a $20,000 handicapped elevator to reach its balcony—even though all of its handicapped members were perfectly happy sitting in their reserved section on the main floor. These things can cripple the operation of a church for years. Most government agencies may still ask free churches to do these things, but they realize that courts do not have jurisdiction over them and do not try to enforce these rules upon them. |
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| Is a church exempt from paying taxes on the money it receives? | | Church organizations that receive an IRS 501(c)3 exemption do not need to pay taxes on money received (except for the cases where the IRS withdraws their tax-exempt status retroactively—then they might have to pay years of back taxes). | | A church does not need to ask the IRS for tax-exemption because the IRS does not have authority over it in the first place. The IRS recognizes that it does not have authority to tax churches that are not incorporated. The Internal Revenue Code, Sec. 508 Special Rules with Respect to Section 501(c)3 Organizations states in 508(c)1:
"Mandatory exceptions.—subsections (a) and (b) shall not apply to (A) churches, their integrated auxiliaries, and conventions or associations of churches…" |
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| Are tithes and offerings deductible from the income tax of the people who give them to the church? | | In the vast majority of cases, a tax deduction to an organization with 501(c)3 status will not be challenged. IRS Publication 78 lists all of the 501(c)3 organizations, and most IRS auditors would have the ability to check it if they wanted to. However, in practice, many auditors do not check. Church deductions are frequently disallowed by the IRS because the giver does not have cancelled checks or if the amount is much larger than previous years. Getting the deduction reinstated is nearly always possible, but requires the individual to pay the tax, file an amended return, and then sue the IRS (which will probably not contest this kind of suit). | | Church offerings are tax deductible without 501(c)3 status. IRS publication 526, Charitable Contributions, page 2 says:
"Organizations That Qualify To Receive Deductible Contributions: You can deduct your contributions only if you make them to a qualified organization. To become a qualified organization, most organizations other than churches and governments, as described below, must apply to the IRS." Notice that churches are treated like governments. Your public school or city hall probably does not have a 501(c)3, but the IRS would not challenge deductions for them. Reminding an IRS examiner of the above facts will frequently (but not always) cause them to accept free church deductions. |
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| Can a church receive postal discounts for Periodicals and Standard Mail? | | The Post Office offers mail rate discounts to "nonprofit organizations". It has its own qualification standards for such discounts, but readily accepts a copy of the IRS 501(c)3 letter as proof of being nonprofit. It is important to realize that the Post office can change these discounts at any time. This paper is accurate only as of the date of this writing. The nonprofit periodical discount used to be much greater. | | Post Office Publication 417 says:
"Alternatively, you may use a complete financial statement from an independent auditor—such as a certified public accountant—substantiating that your organization is a nonprofit organization." It is questionable if the legal definition of "organization" would include a free church. This author wonders what would happen if a CPA wrote a letter to the post office assuring them that a free church did not operate for profit, but that its finances were confidential and would not be shared with the Post Office. If the Post Office refused to grant the lower rates, the church must simply accept it. |
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Is a church exempt from state and local sales taxes?
(Note: Sales tax is a tax on the seller, not the buyer (it is not "buyer's tax"). If the tax is not collected, the seller will be held liable for it and possibly penalized for deliberately not collecting it. ) | | Becoming incorporated or obtaining 501(c)3 status does not automatically make a church exempt from sales tax in any state. However, most states grant a sales tax exemption—complete with a state ID number—to organizations based upon their own internal forms. IRS 501(c)3 status is the primary means they use as proof that an exemption should be granted.
In practical fact, churches with 501(c)3 status routinely receive sales tax-exempt numbers from the 50 states. | | When a church voluntarily purchases an item and pays sales tax, the state gains no authority over it. A church is free to buy taxed items or to mail-order from states without sales tax. Some people believe that asking the state to be exempt from sales tax makes the church indebted to the state. Others take the approach that a church should be able to ask the state not to tax stores for selling to it. If the state agrees without asking for authority or favors in return, Christ is not displaced as head of that church. When Paul discovered a plot to kill him, he did not place himself under the state by asking a centurion to tell his plight to the Roman commander (Acts 23:18). Another approach: some churches have submitted their own forms to retailers asserting that their purchases are not taxable and the retailers have agreed not to collect tax on items they sell them. Churches using this approach usually promise to reimburse the retailer if the state tries to collect the tax from them. |
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| Are the rights of a church protected by the Constitution? | | The Declaration of Independence states: "All men are created equal, that they are endowed by their Creator with certain unalienable Rights." The Constitution is similar. It recognizes rights, but does not claim to grant them. God, our Creator, grants people rights. The state is the corporation's creator and grants it rights. "A corporation is not deemed a person within the clause of the Constitution of the United States protecting the privileges and immunities of citizens of the United States from being abridged or impaired by the law of a State…" (Bouvier's Law Dictionary, 8th ed., Corporations Not a Person). Courts sometimes apply constitutional protections to church corporations even though they do not have to. The application is inconsistent and more likely to happen when an individual or business sues a church. Church corporations have a very difficult time asserting any rights against the federal or state government that created them. | | The First Amendment of the U.S. Constitution states: "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances. " This is not a group of unrelated rights thrown together, but related items requested by many of the free churches in the 1700s. Free churches have all of these rights. IRS Code section 501(c)3, quoted in the foundational documents of most churches, says: " no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation." If a church were to exercise its right to "petition the Government for redress of grievances", a remedy in the form of legislation is a likely possibility. Yet corporate churches, when they are formed, agree not to "influence legislation". They clearly do not have the same rights that a free church has. |
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| Can a church sue in court? | | A corporation can sue, but it must use licensed attorneys. Even ministries whose primary function is filing lawsuits may find that corporation restrictions do not help them serve Christ any better. | | A free church cannot sue in its own name. If there is some righteous need to sue in court, a member of the congregation can sue—representing himself if desirable, with assistance from other members if necessary. |
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| Can a church be sued in court? How can it defend itself? | | A church can be sued in its corporate name. About 80% of suits against church organizations are from disgruntled members or former members of the group. Courts will often reject a case if the plaintiff has not used a church's own written internal dispute-resolution process, but they do not have to do so. Corporations must have a licensed attorney appear in court for any suit, no matter how frivolous. If the officers of a corporation fail to send an attorney, the state government can respond for it. This is a definite disadvantage. Nevertheless, it is easy to see why attorneys like corporations—they provide much income. | | When a free church has a written internal dispute resolution process, courts virtually always decline jurisdiction in favor of that process. Attempted suits against free churches must either try to assert that the church actually is an unincorporated association (hard to do when it has documents declaring otherwise) or name individual church members. A free church does not have to turn over its membership list. Individuals (as opposed to corporations) can avoid being served to appear in frivolous suits by refusing to sign for registered letters or accept papers in person. Named members can decline to represent the church in court, explaining that the court has no jurisdiction or they can specifically state they are making a "special appearance" on behalf of the church. (A "special appearance" means that they volunteered to be there—that they are not required to be.) If an individual in a church is accused of a crime or tort (a civil wrong against someone), he should defend himself and leave the church out of it. |
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Is liability protection available for church members?
(Note: These answers are about frivolous claims. If a church really hurts someone or accumulates debts, its liability should not be limited—it should "fix what it broke"!) | | Some protection is offered. If a person had an accident at a church service that was not the fault of any specific people there, he would most certainly sue the corporation rather than individual church members. Even if one church member caused the problem, the offended might sue just the corporation—but he could sue both. Some personal protection comes from the fact that corporations are better targets for lawsuits. Juries and judges frequently award money to plaintiffs for questionable complaints because corporations "have money to pay". They are less likely to take away the life savings of an individual because someone "slipped on their sidewalk". | | Suits against entire church memberships for an action by the church are almost non-existent. The plaintiff would have to serve every member individually—which can be very difficult to do if the church refuses to provide a membership list. They would have to prove that all the members are at fault. Juries and even some judges are much less likely to make individuals pay for some trivial complaint. If a complaint is against individual church members, they can be sued in the same manner as if they were not church members. |
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Is liability protection available for church leaders?
(Note: These answers assume that claims are frivolous. If a church leader hurts someone, liability should not be limited.) | | The personal assets of leaders will be protected in certain cases against a church corporation. However, becoming a corporate officer or board member makes each one personally liable for following tens of thousands of corporate laws and government regulations. Indeed, there are numerous laws that assess penalties directly against the officers of corporations. About 40% of lawsuits against corporations "pierce the corporate veil"—obtain judgments against people as well as the corporation. All that is usually necessary is to prove a man negligent in one of his vast number of legal corporate duties. | | Since courts have no jurisdiction over free churches, there are no laws regarding responsibilities of pastors, elders, teachers or any other church leaders. They cannot be sued for "failure to carry out their duties", whereas corporate officers can be. They must be sued as individuals under laws that apply to individuals—no different than suits against church members. They cannot be held liable for breaking the massive body of code sections that govern corporations and their officers. Stories of people being injured at a church social and suing the church member who planned it or who signed the check to lease the facility are greatly exaggerated. These stories are told mainly by lawyers and insurance salesmen. Who should the Church look to as its protector? God or the state? |
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| Can a church obtain liability insurance for accidents during church services and activities? | | Most insurance companies are very happy to provide policies to cover the corporation. These policies are not cheap because so many people sue corporations—many over frivolous issues—hoping to get some money even if they just "settle out of court". | | An insurance policy or documented wealth are two main things for which lawyers look for before they consider filing a suit. An uninsured free church is a poor target for litigation. Many insurance companies do not know how to work with free churches, and a free church could not sue the company if it failed to pay an insurance claim. However, leaders and individuals who work on behalf of a church can obtain personal or some kind of group insurance policies. |
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| Can the church have a bank account? | | Yes, almost every bank will offer a corporation an account. The corporation must use a federal government issued EIN (employer identifier number—the corporate equivalent of an SSN, Social Security Number). | | With patience, a free church can establish a non-interest-bearing account without a government EIN (Employer Identification Number)—without the need to file any kind of tax return. Church documents will need to be drafted authorizing certain members to sign checks. Bank laws require banks to ask customers for an EIN or SSN to open an account, but they can open it without one if they keep special records of such accounts. The internal procedures of some banks—especially branch banks will prevent this. Presidents of small banks are often willing to do it. |
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| Can a church own real estate? | | Corporations can own real estate in their own name. Judgments against a corporation can force the sale of that property much easier than those against individuals or free churches. | | Free churches have owned real estate for hundreds of years, but the methods vary among the 50 states. Some permit title to be held in the name of Jesus Christ with church members acting on His behalf. Other states will accept property held as a trust. Other methods are also possible. |
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| Can a church lease real estate? | | Corporations can lease real estate in their own name. All of the standard landlord-tenant laws apply. | | Property owners will often lease to a free church. If a dispute arises, going to court will be difficult. But, much goodwill often exists on both sides of such leases. The congregation wants to represent God well and keep the building they use, so they take care of it and pay their rent. Owners usually do not want to "gouge God". They realize that church leaders talk to each other—if a congregation stops renting because of high rent or poor repairs, finding another renter will be difficult. |
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| Can a church borrow money from a bank to buy real estate (or for other purposes)? | | Corporations can do this easily. Also, if they find themselves unable to pay off their loans, they can file for bankruptcy and the church membership or leaders will not have to pay the bad loans. What kind of way is this to represent God? | | A free church cannot do this. What a blessing! Banks would have no good way to enforce collection of the loan or repossess the building if the church did not pay. If a church cannot afford to buy its property, it should lease it until it can accumulate money. |
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| Can a church continue to exist perpetually - beyond the life of individual members? | | With corporations, the state reminds the corporation of its existence by collecting fees every year. Unfortunately, members almost always accept the legal continuance of the corporation as equivalent to the spiritual continuation of the congregation—which is often not true. In spite of efforts to solidify a church's mission and doctrines in its corporate documents, incorporated churches frequently undergo major changes in purpose over decades. Groups founded by Bible-believing, spirit-filled men can end up supporting secular humanism. | | Free Churches also can continue to exist as long as there are members continuing to abide by its documents. However, if the members stop meeting and acting in the name of the congregation, it dies a natural death. When churches or ministries are primarily the work of one man or a few men, it is probably better that the group ends when its leaders die. There is little point in continuing to use the name, teachings and techniques of former leader when the successors do not have the same spiritual gifts or calling from God. |
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| Does a church need to use a DBA? (Doing Business As) | | If a corporate church uses multiple names (its congregation name, name of an evangelistic project, name of a publication, name of a youth ministry, etc), some laws may require the corporation to have a DBA for each name registered with the county or state. Banks and other businesses may justifiably refuse to do business with a corporation that does not follow the applicable laws. | | Free churches do not need to register DBA names because they are not businesses. Some banks or other businesses may insist that a church must have a registered DBA name, but when asked what law requires a church to use a DBA name, they will readily admit that there is no such law. A free church does not need a registered DBA name for the name of the church or any of its ministries. |
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| Can people feel comfortable with a stable, ongoing structure? | | People feel comfortable with a stable corporate structure supported by the state (Numbers 11:4-5, Hebrews 11:24-25, Mark 13:1-2). | | The history of God's people is often not stable. They were persecuted, moved about and sometimes led by the Spirit of God on a moment's notice (Matthew 8:20; Acts 8:1; 16:7; Hebrews 11:37). |
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| Will one method make a church look "respectable" and the other like a "fraud"? | | While many people consider a 501(c)3 corporation "respectable", the vast majority of phony churches created for a tax benefit only are 501(c)3 corporations—because they want to "look respectable", too. Keeping this status is just a matter of satisfying the paperwork-mill, at which many "frauds" are skilled. The Church of Satan, witches groups, occultists, homosexual churches, abortion groups and other unbiblical groups all form 501(c)3 corporations with the blessing of the state. The existence of evil examples does not mean that all other 501(c)3 churches are evil, but one should never think that the state is a good judge of God-approved religion. | | A few groups that claim to be free churches are frauds—not engaged in a significant ministry, but using church constitutional protection to avoid taxes. Such instances are less common and usually much smaller in scope than corporate frauds, because a free church has less business capability than a corporation. A few free churches teach false anti-government ideas or teach that some races are not eligible for salvation. Free churches should clearly state that they do not agree with all other free churches, but it is not possible to avoid all "bad associations" in people's minds. Christ's Apostles included Matthew, a former tax collector (Matthew 10:3), and Simon, a former Zealot (Acts 1:13). Zealots were an anti-government group of that time. |
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| Which method of operation is more likely to attract "undeserved trouble" from the government? | |
This is a relevant question, but accurate information on it is difficult to get. The government keeps no statistics on how much "undeserved trouble" it causes. Governments keep records to show that their causes are just and right—indeed, many actually are. Yet many times over the years, state government and IRS employees have testified that they launched extensive investigations that nearly or completely ruined certain groups, essentially for political purposes. |
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| When a minor complaint is received against an incorporated 501(c)3 church, a government agency may simply check that its paperwork is in order and if so, let the complaint go. But for major complaints, government agencies do not automatically assume that a group is legitimate just because they are a 501(c)3 corporation. They realize that the state corporation departments and the IRS do not have time to check the truth of most statements made to them and criminal groups have been 501(c)3 corporations for years. Once a major investigation begins (whether just or unjust), incorporation and 501(c)3 status give the government a lot of power over the group. | | The Indianapolis Baptist Temple, which had some of its property seized by the IRS, is sometimes cited as an example of what happens to unincorporated churches. What is seldom explained is that the Indianapolis Baptist Temple formed several corporations years ago and then one day simply stopped responding to all of its corporate paperwork. They did not use established methods to terminate their corporations so the state still had clear jurisdiction. They did not terminate their employer agreements with the IRS, so it continued trying to enforce them. God teaches that we should keep our agreements, even when they are to our disadvantage (Psalm 15:4, Joshua 9:3–19). Any group that has corporations or 501(c)3 status should use the proper procedure to end them. |
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| How much time is required to get the church started? | | Ten hours to 200 hours. The more professionals used, the less time for the church. The IRS estimate just to keep records and file form 1023 for 501(c)3 status is 76 hours (page 7, form 1023). | | About 150 to 300 hours, depending upon how much one spends. Much of what one learns will be useful for the rest of one's life. Learning to restore freedom to churches is far more uplifting than following a complex, changing bureaucracy. |
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| What is the cost to get the church started? | | A few hundred dollars to a few thousand dollars—the more professionals used, the more expensive. | | One to several hundred dollars for educational materials (which you might be able to borrow from a friend) and a few dollars for documents. |
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| What method will provide the most standardization of operation? | | Corporations are clearly more standardized because the state imposes thousands of operation regulations on corporations. This is more of an advantage to the state in supervising them than to the churches—unless church workers are changing churches frequently. | | The Scriptures do not teach standardization of methods, but following God's direction for each situation. Christ told His disciples to take nothing with them at times, and later told them to make preparations (Luke 22:35–36). Paul accepted money from some churches, and not from others (2Corinthians 11:7–8). Ezekiel was a captive of Babylon (Ezekiel 1:1) at the same time Daniel served in the palace of the king of Babylon (Daniel 1:19). |
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| Which method provides the greatest ease of long-term operation? | | Governments continue to add regulations and paperwork to corporations of all types—setting their own timetables and deadlines. About 75% of small businesses choose not to be incorporated for this reason. | | A free church must maintain its own internal documents authorizing members to act on its behalf when Christ so directs. It must look to the needs of its members. It must make time to hear a member who goes through the Matthew 18:15-17 process. These are the very things that Christ commanded |
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| Which method is best for a hierarchical church denomination? | |
| The author of this paper believes that hierarchical, denominational church organizations are contrary to Scripture, but included this question to help show why incorporated churches are now common. | |
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| A centralized denominational "headquarters" can efficiently control local congregations throughout the world using the same corporate structures and laws as multi-national corporations. A central "legal department" can keep up with government paperwork much better than individual congregations. When international standardization, control and budget are important considerations, the advantages of incorporation may outweigh the disadvantages. | | The free church is not well suited to hierarchical control. Anything that happens in a local congregation must be approved by the members or by someone they have authorized. While it is possible for local members to give authority to a denominational headquarters, the members could take it away at any time. The headquarters has no legal way to enforce anything against a local free church. All the headquarters could do is threaten to remove them from the denomination. (One would have simply a system of voluntary cooperation—exactly what Christ wants in His church!) |
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| Which method is best for local congregations directly responsible to Christ? | | This method creates numerous burdens of responsibility to the state, which God clearly instructs us to avoid. Even the highly touted economic benefits do not outweigh the risks involved with incorporation and 501(c)3 status. | | A free church seems to be what Christ had in mind, from the original churches of the first century, to the free churches during the Protestant Reformation, to those that worked for American independence and religious freedom, to the free churches we desperately need today—to call people to repent and turn, not to corporate religion, but to God and His Word! |
