How to Legally Start a Church in the U.S. without Making Costly Mistakes

It is a noble duty to start a church; it isn’t just like starting a new business – it is a calling  full of passion and purpose. But a lot of church leaders have legal problems that can slow down or even stop their goal if they don't deal with them right away. If you want to build a strong and sustainable ministry, it's crucial to avoid making costly mistakes early on. This full guide is for congregations with fewer than 900 members and tells you everything you need to do legally to start a church in the U.S. the right way. It goes along with Tier 1: THE STARTUP PLAN, which gives new churches the essential legal tools and guidance they need.

Understanding the Church's Legal Basis

A church is both a spiritual community and a legal entity. This is tough for some pastors – because they just want to do good, preach the Word and help people. But, you can't only gather people together; you also have to follow the rules set by the federal, state, and local governments, keeping a Biblical model of leadership in mind. If you don't know how to do both jobs (spiritual and legal), you could get hurt, your family could get hurt, you can lose money, or terribly, lose your tax-exempt status.

Why is the structure of the law important?

The way your church is set up legally determines how it functions, how it protects its leaders, and how it obtains tax breaks. Most churches choose to become nonprofits so that they can achieve 501(c)(3) status and not have to pay federal taxes. This also helps donors by lowering their taxes.

If a church doesn't follow the rules for incorporation and compliance, its leaders could be held personally accountable, it could lose donations, and it could have difficulties getting bank accounts or signing leases or obtaining property.

Step 1: Find Out What Your Church's Goal and Mission Are

Clearly, not only does having a clear mission statement and objective inspire people, it's also wise from a legal point of view.

• Write down what you want to do: The IRS advises that your church’s main objective should be to help people, teach them, and/or do something beneficial for the community. A strong, unambiguous purpose statement makes it easier to run a business and file legal papers.
• Values and Goals: Set the core beliefs of your church, a statement of faith, and what it wishes to accomplish to aid the community, and its outreach goals. This clarity affects how things are done, the regulations, and the roles of leaders.

Tip: Make sure that all of your documents have the same obvious objective. If things aren't clear, it could take longer to get permissions or cause legal issues down the road.

Step 2: Choose the Right Business Structure

Make it a nonprofit business. Most churches in the U.S. are nonprofit organizations at the state level.

• Why do you want to establish a corporation? When a business becomes a corporation, it is no longer connected to its owners and managers. This saves pastors and board members from having to pay church debts or litigation out of their own pockets.
• Incorporation by the state: Send your Articles of Incorporation to the Secretary of State. The name of your church, its purpose, its registered agent, and its first directors are all on this document.
• Just incorporating doesn't make you tax-exempt. To get 501(c)(3) status and not have to pay federal income tax, you need to apply to the IRS separately. Donors can also deduct their gifts from their taxes, which is a terrific way to get money for your church and cause.

Ask a professional for help: A church lawyer for nonprofit creation makes sure that all the documentation needed to start a nonprofit is legal in both the state and the IRS. This stops items from being late or refused, which can cost a lot of time and money. It is much easier to get it set up right, right from the start, than to make an error and try to get it fixed.

Step 3: Make a List of All the Rules for the Church

Your bylaws are the rules that govern your church- they are like its "constitution." They tell you how your church works and how it makes choices.

• Leadership Roles: Tell them what pastors, elders, and board members do and what they can do.
• Membership: State who is eligible to be a member and what rights they have.
• Meetings: Write down the rules for voting and how board meetings should be managed.
• Conflict Resolution: Have a means to handle disagreements within the group.

Good bylaws protect your church's legal status and make things easier to understand in the future. And when done right, protect the Pastor and his family from rogue boards and future church splits.

Tip: You might want to employ someone who knows how to develop bylaws for churches to make sure they fit your church's size and ideals.

Step 4: Get an EIN, or Employer Identification Number

Every church needs an EIN for things like taxes, payroll, banking, and more.

• How to Apply: The IRS will provide you an EIN for free and swiftly online.

Why It Matters: An EIN enables your church to operate legally, hire employees, open bank accounts and comply with IRS requirements.

Step 5: Ask the Federal Government for Tax-Exempt Status

Churches automatically have IRS section 501(c)(3) status. However, if you want the all important IRS Determination Letter, they will have to apply to the IRS and to do so, they have to meet certain rules.

• Prepare Your Application: Fill out IRS Form 1023 or the simpler 1023-EZ if you meet the requirements.
• Paperwork: You will need a copy of your Articles of Incorporation, bylaws, financial records, and a thorough description of what your church does.
• Get help from a lawyer: A lawyer who specializes in 501(c)(3) compliance can help you fill out and look over your application to make sure it is correct and has a better chance of being approved. The application for a church is typically about 40 pages of IRS jargon, so it is easy to get lost if you don’t know what you are doing here!

The IRS will take a few months to conclude the process, so it's crucial to plan ahead.

Step 6: Register with Your State and Local Agencies to be tax exempt in your state.

This usually requires an IRS Determination Letter, but state registration varies; however, it usually comprises the following:

• Filling out the forms to the tax controller
• Asking the state for a tax break.
• Signing up to raise money from public (typically for non-churches only).

If your church fulfills these rules, it can only ask for money.

Step 7: Make Sure the Housing and Compensation for the Pastor Are Set Up Correctly

It is very important to follow the IRS rules about how much pastors should be paid and how much they should earn for housing.

• Pay: Give pastors a reasonable salary and benefits package.
• Money for housing: If done correctly, part of the remuneration should be deemed a housing allowance, which is not subject to income tax.
• Legal Help: Talk to a pastor compensation housing allowance lawyer to make sure you're obeying the regulations so you do not lose this incredible benefit, and get the maximum tax breaks.

Having the appropriate paperwork protects your church and its pastors when the IRS comes to check on them.

Step 8: Set Up Waivers for Liability and Risk Management

Churches are at risk of things like accidents happening on their property and volunteers acting badly.

• Liability Waivers: Get waivers to protect the church when people, whether members or visitors participate in church activities.
• Insurance: Make sure you have the necessary kinds of workers' compensation, property, and liability insurance.
• Rules for Volunteers: Set up legal protections and training requirements for volunteers.

A sound plan for church risk management and liability waivers makes things safer and minimizes the chance of getting sued.

Step 9: Get Basic Legal Help with the STARTUP PLAN

The STARTUP PLAN enables churches who are just starting out with a full and affordable legal base:

• 10% off on legal work that isn't part of a bigger project.
• 25% off hourly rates for legal labor.
• $250 a month in credit for legal work to pay for further questions or papers.
• Get quick responses to your legal questions by email.
• Access to the STRONGCHURCHES course and crucial publications for self-directed legal education.
• Get in touch with a great group of lawyers and church leaders.

This approach strikes a good mix between getting guidance from experts and staying within your budget. And furthermore, the Bible says there is victory, strength and wisdom with counsel! This will offer you that victory and wisdom and importantly - peace of mind  - to keep you secure from the start.

Final Thoughts: Start Your Church in a Way That Is Legal and Strong

Starting a church is like running a business and a ministry at the same time. Having the right legal structure for your church protects your leaders, your mission, and your members. This helps your church grow without any hassles. To prevent making costly mistakes, carefully follow these nine steps and adopt the STARTUP PLAN, which is created particularly for small churches. Your ministry needs a solid legal partner to help you from the very beginning.

Links Inside:

• Help with forming a church
• Help with writing church rules
• Help with finding out how much to pay a pastor

Links to Other Websites

• IRS EIN Application
• IRS Form 1023 Information
• ECFA (Evangelical Council for Financial Accountability)

This blog post is intended for information and does not give legal advice. You do not become a customer of Church Law and Strategy or any of its representatives by reading this. You should consult a lawyer who is allowed to provide you legal guidance that is specific to your church or group.