formation-process

Purpose

This guide provides a complete roadmap for establishing a church as a nonprofit organization and obtaining IRS 501(c)(3) tax-exempt status. It covers state incorporation, federal tax exemption, and compliance requirements.

Starting Point: Bible Study Group vs. Church

Many churches begin as informal gatherings. Here’s how to know where you stand:

Bible Study Group (Not Yet a Church)

Small group studying scripture together
No formal structure or leadership
Family members only
Discussion-focused (no worship elements)
No statement of beliefs

Church (IRS Definition)

Regular congregation (not limited to one family)
Structured worship services (not just discussion)
Designated leadership (pastor/minister)
Consistent meeting location
Written doctrine/creed

Transition Checklist

To grow from Bible study to church:

Non-family members - Include people outside immediate family
Worship elements - Add prayer, singing, teaching/preaching
Leadership - Designate pastor, elder, or leader
Statement of faith - Write down your core beliefs (1-2 pages)
Regular schedule - Meet at consistent times/location
Growth - Invite others, grow beyond initial group

Note: You don’t need all of these immediately. Many churches started with 3 people in a living room. The key is intentionally building toward church structure over time.

Key Finding: Churches Are Automatically Tax-Exempt

Important: Churches (including synagogues, mosques, and temples) that meet IRS requirements are automatically considered tax-exempt under Section 501(c)(3) and are not required to apply for recognition of exempt status.

Why Apply Anyway?

Many churches still choose to file for 501(c)(3) status because:

Credibility: Provides official IRS determination letter for donors and grantmakers
Banking: Many banks require proof of tax-exempt status
Grants: Grant providers typically require IRS recognition
Legal Protection: Written confirmation of tax-exempt status
Donor Confidence: Formal documentation that donations are tax-deductible

Step-by-Step Formation Process

Step 1: Incorporate with Your State

Action: File Articles of Incorporation with your state (Secretary of State or Corporation Commission)

Requirements:

All states except West Virginia permit church incorporation
File as a nonprofit religious corporation
State incorporation law varies by state

Articles of Incorporation Must Include:

Official church name
Purpose statement (religious and charitable)
Initial directors/board members
IRS-required provisions for tax exemption

Key Provision for 501(c)(3): If you intend to seek federal tax-exempt status, your Articles must contain specific IRS-required language stating:

Organization operates exclusively for religious/charitable purposes
No net earnings benefit private individuals
Upon dissolution, assets must go to another 501(c)(3) organization

Step 2: Obtain an EIN (Employer Identification Number)

Action: Apply for an EIN from the IRS

Details:

Cost: Free
Purpose: Required to open bank accounts, employ staff (like a pastor), accept donations
How: File with IRS online or via Form SS-4
Timeline: Immediate (online) or 2-4 weeks (mail)

Step 3: Draft Church Bylaws

Action: Create bylaws that define your church’s governance structure

Purpose:

Set internal rules for church governance
Required by IRS and most states for incorporated churches
Resolve conflicts between members
Provide consistency during leadership transitions

Bylaws Should Include:

Church membership requirements
Board of directors structure and elections
Meeting procedures
Financial management policies
Amendment procedures
Dissolution clause (assets to another 501(c)(3))

Important: Bylaws often combine state corporate law requirements with religious doctrine to represent the church’s beliefs and structure.

Step 4: Apply for 501(c)(3) Status (Optional but Recommended)

Action: File IRS Form 1023 or Form 1023-EZ

Form Options

Form	Eligibility	Filing Fee	Timeline
Form 1023	All churches	$600	6-9 months
Form 1023-EZ	Gross receipts ≤ 250,000	$275	2-4 weeks

Note: Churches are prohibited from using Form 1023-EZ according to some sources, though the simplified form exists for smaller organizations.

Required Documentation

Financial Documents:

Statement of Revenue and Expenses (3-year projection for new churches)
Current year financial statements
Detailed budget

Organizational Documents:

Articles of Incorporation (certified copy)
Bylaws (adopted copy)
EIN confirmation letter

Narrative Information:

Detailed description of religious activities
Description of worship services and programs
Information about facilities
Leadership and governance structure
Compensation arrangements

Size Requirements

Congregation Size: No Minimum

There is no minimum congregation size requirement. The IRS uses the same standards whether you have 5 members or 5,000:

Churches meeting in homes with a handful of congregants qualify
No building or property required
Size of congregation is not a factor in the 14/15 point test

“Some churches have hundreds of attendees while others are still in the planning phases or have just begun meeting in a home with a handful of congregants. No matter how big or small the church is, the IRS uses the same standards.”

Board of Directors: Minimum 3 Members

The IRS requires at least 3 board members for tax-exempt approval:

Requirement	Details
Minimum	3 board members
State laws	Some allow 1-2, but IRS regularly rejects fewer than 3
Recommended	3-7 directors for small/new churches
Family rule	Family/business associates cannot be the majority

Why 3 Members?

IRS wants checks and balances in governance
One person doing everything (preaching, finances, contracts) raises red flags
Decisions should be made collectively, not unilaterally
Protects against appearance of “personal business in disguise”

State vs. Federal:

Georgia only requires 1 board member for state incorporation
But IRS requires 3+ for 501(c)(3) approval
Always plan for the higher federal requirement

IRS Qualification Criteria for Churches

What the IRS Considers a “Church”

The IRS uses a combination of characteristics to identify churches (not all are required):

Essential Characteristics:

✓ Distinct legal existence (state incorporation)
✓ Recognized creed and form of worship
✓ Established congregation served by organized ministry
✓ Regular religious services
✓ Religious education for the young
✓ Dissemination of a doctrinal code

Supporting Characteristics: 7. Definite and distinct ecclesiastical government 8. Formal code of doctrine and discipline 9. Distinct religious history 10. Membership not associated with other churches/denominations 11. Organization of ordained ministers 12. Ordained ministers selected after completing prescribed studies 13. Literature of its own 14. Established places of worship 15. Sunday schools or religious instruction programs

Court Guidance: “While some of these are relatively minor, others (existence of an established congregation served by organized ministry, regular religious services, religious education) are of central importance.”

New Religions vs. Established Religions

Yes, you can start a new religion and qualify for 501(c)(3) status.

However, there are important distinctions:

Factor	Established Religion	New Religion
Classification	Usually qualifies as “Church”	Usually classified as “Religious Organization”
Tax-Exempt Status	Automatic (no application required)	Must apply via Form 1023
Form 990 Filing	Exempt	Required (unless gross receipts < $50,000)
Path Forward	Full church benefits	Can evolve to “church” over time

Why the Distinction? The IRS considers “distinct religious history” as one of the 14/15 characteristics. New religions haven’t established this history yet. However:

What the IRS Cannot Do (First Amendment Protection):

Cannot evaluate the content or sources of your religious doctrine
Cannot judge whether beliefs are “valid” or “legitimate”
Cannot require adherence to established/traditional religions

What the IRS Does Require:

Members must have sincere and meaningful belief in the doctrine
Beliefs must occupy a place parallel to that filled by God in traditionally religious persons’ lives
Organization must meet standard 501(c)(3) organizational requirements

Building Toward Church Status: Courts emphasize these four criteria for newer organizations:

Existence of an established congregation served by organized ministry
Provision of regular religious services
Religious education for the young
Dissemination of a doctrinal code

Once a new religion establishes these over time, it may qualify for full “church” classification.

General 501(c)(3) Requirements

All religious organizations must meet these requirements:

Exclusive Purpose: Organize and operate exclusively for religious/charitable purposes
No Private Benefit: Net earnings cannot enrich private individuals (beyond reasonable compensation)
Limited Lobbying: Lobbying cannot be a substantial part of activities
No Political Campaigns: Cannot intervene in political campaigns for/against candidates
Legal Purpose: Purpose and actions cannot be illegal or violate public policy

Churches vs. Religious Organizations

Churches

Automatic 501(c)(3) status (no application required)
No annual information returns (Form 990) required
No public support test required
Includes: places of worship (churches, synagogues, mosques, temples)

Religious Organizations

Must apply for 501(c)(3) recognition (Form 1023/1023-EZ)
Must file annual Form 990 (unless gross receipts < $50,000, then Form 990-N)
Must meet public support test
Includes: nondenominational ministries, ecumenical organizations, religious study groups

Ongoing Compliance Requirements

Annual Filing Requirements

Churches: Generally exempt from filing Form 990

Exception: Must file Form 990-T if unrelated business gross taxable income exceeds $1,000

Political Activity Restrictions

Prohibited:

Participating in political campaigns for/against candidates
Making campaign contributions
Making statements supporting/opposing candidates

Limited:

Legislative lobbying (cannot be substantial part of activities)

Financial Restrictions

Required:

No private inurement (earnings benefiting insiders)
Reasonable compensation for services
Proper documentation of expenses

Upon Dissolution:

Assets must transfer to another 501(c)(3) organization
Cannot distribute to members, directors, or officers

Employment Considerations

Payroll Taxes:

Churches are exempt from FUTA tax (Federal Unemployment Tax Act)
Must still withhold income tax and Social Security/Medicare for employees

Ministers: Special tax rules apply (may be exempt from withholding)

Alternative: Group Exemption

Option: Join an Association of Churches or integrated auxiliary instead of applying independently

Benefits:

Share tax-exempt status with larger organization (parent organization)
Avoid individual application process
Lower administrative burden

Considerations:

Must meet parent organization’s membership requirements
Less independence in governance
Parent organization’s policies apply

State-Specific Considerations

Important: Every state has different requirements for nonprofit and church regulation

Research Required:

State nonprofit corporation laws
State tax exemption (separate from federal)
Annual state filing requirements
Charitable solicitation registration (if applicable)

California Specifics

Key Point: Unlike federal automatic exemption, California requires churches to apply for state tax exemption.

Requirement	Federal (IRS)	California (FTB)
Automatic for churches?	Yes	No
Must apply?	Optional	Yes
Form	Form 1023	Form 3500 or 3500A
Fee	$600	Free

California Tax Exemption Options:

With IRS determination letter: File Form 3500A (simpler) + copy of IRS letter
Without IRS letter: File Form 3500 (more complicated)

California Corporation Types:

Public Benefit Corporation
Mutual Benefit Corporation
Religious Corporation (for churches)

California Attorney General: Churches are exempt from charity registration and annual reporting requirements.

Property Tax: May need IRS determination letter to obtain property tax exemption for church land and facilities.

Why Get the IRS Letter in California:

Simplifies state tax exemption (Form 3500A vs 3500)
Required for property tax exemption
Protects donors if audited (IRS may disallow deductions without formal determination)

Cost Summary

Item	Cost	Timeline
State Incorporation	200 (varies by state)	1-4 weeks
EIN Application	Free	Immediate-4 weeks
Form 1023	$600	6-9 months
Form 1023-EZ	$275	2-4 weeks
Legal/Professional Help	5,000+ (optional)	Varies

Common Pitfalls to Avoid

Missing IRS Language in Articles: Ensure your Articles of Incorporation contain required 501(c)(3) provisions
Incomplete Bylaws: Draft comprehensive bylaws that satisfy both state law and IRS requirements
Insufficient Documentation: Provide detailed financial projections and activity descriptions
Political Activity: Clearly prohibit political campaign intervention in governing documents
Private Benefit: Ensure no earnings benefit private individuals

Resources & Next Steps

IRS Resources

Churches & Religious Organizations - Official IRS guidance
Publication 1828: “Tax Guide for Churches and Religious Organizations” - Comprehensive IRS resource
How to Apply for 501(c)(3) Status - Application guidance

Professional Help

Consider consulting:

Nonprofit attorney: For state incorporation and bylaws
CPA/Tax professional: For IRS application and compliance
Church formation service: Organizations specializing in church startups