Anyone considering incorporating a church in Indiana needs to understand several legal issues before jumping in. Since most churches are incorporated as nonprofits in order to obtain federal and state tax breaks available to nonprofits, it is necessary to know both the legal definition of a church, as well as the parameters of a nonprofit.
In addition, there are legal and procedural steps to take while incorporating a nonprofit in Indiana. And, after all that, the Internal Revenue Service (IRS) has other requirements to be sure the organization qualifies for nonprofit status.
What Is a Nonprofit?
While a church can be a nonprofit, there are other types of nonprofits, too, and it's important to understand the term.
It is easy to confuse the term "nonprofit" with rules forbidding a company from earning profits. This is by no means the case, not in Indiana nor in any other state. Rather, a nonprofit is an organization that funnels any and all donations and profits into the mission of the organization. Those in charge of the organization, like directors or officers, cannot receive profits from the organization.
What Is a Church Under IRS Guidelines?
Churches are granted special tax-exempt status by the state of Indiana as well as by the IRS under Section 501(c)(3) of the U.S. Tax Code. It is no surprise that there are precise legal guidelines in place for figuring out which organizations can and cannot claim religious affiliation and church status.
While the word "church" generally conjures up images of a building with a steeple, doors open, and people pouring in on Sunday morning to sit in rows of pews, this has no relationship to state or federal law. The IRS attempts to clarify the definition of a church or religious organization with specific regulations. These have changed over time as the courts have ruled on these issues.
Elements of a Nonprofit Organization
Today, these are some of many elements that the IRS looks at when determining if an entity is a nonprofit:
- Is the organization incorporated?
- Does it have a history of religious beliefs?
- Does it have an acknowledged creed and form of worship?
- Does it have a place of worship?
- Has it built a congregation of people who appear frequently and regularly?
- Do its ministers undergo training or ordination?
Mainstream religions have no trouble meeting these guidelines, but new or unusual types of organizations that seek church status don't have such a good batting average. They may have trouble meeting the federal government's definition. However, the IRS does not require an organization to meet all of its guidelines to be treated as a church, just a sufficient number of them.
What Is a Church Per Indiana Law?
Under Indiana law and that of every other state, a nonprofit corporation is one that has a purpose unrelated to generating profits. While the nonprofit can raise revenue from sales and/or donations, it cannot pay people who work for it excessive salaries or any dividends.
In Indiana, a nonprofit corporation must be formed for one of three types of endeavors. When filing its Articles of Incorporation, the nonprofit must identify itself as a:
- Public benefit corporation.
- Mutual benefit corporation.
- Religious corporation.
"Religious corporation" is the nonprofit category selected by churches. It is defined as "a nonprofit corporation organized primarily or exclusively for religious purposes, such as a church." Once the nonprofit corporation is organized in Indiana, it must seek tax-exempt status at the federal level. If the IRS approves a church's application, the church becomes eligible to obtain tax exemptions.
Filing Requirements to Incorporate a Church in Indiana
Broadly speaking, there are several steps a church must take to become incorporated in Indiana:
- Select at least three directors.
- Hold an organizational meeting of the board of directors.
- Prepare Indiana certificate of incorporation and bylaws.
- File Indiana state forms to incorporate as a nonprofit.
- Get IRS tax-exempt status as a church.
- Claim nonprofit status with the state as a church.
Each one of these steps requires the applicant to jump through a series of hoops. Given that the end goal is coveted tax-free status, many churches do try to complete the challenge.
Board of Directors Organizational Meeting
The church will need at least three directors in Indiana. Once these individuals are named as board members and have accepted the posts, they should hold their first board meeting, called the "organizational meeting" of the board. At this meeting, the board of directors takes basic actions required to move forward, including:
- Reading and approving the bylaws.
- Appointing people to officer positions.
- Specifying an accounting period and tax year.
- Applying for an employer identification number (EIN) required before the church applies for tax exempt status.
- Opening a corporate bank account.
Someone should take notes at this meeting and prepare the first set of minutes. These should be organized in a corporate records binder for the church. The file might also hold core documents like the Articles of Incorporation and bylaws.
Indiana Forms: Articles of Incorporation
The incorporation procedure in Indiana for churches is a matter of state law. Under the Indiana Codes, a nonprofit corporation must file a formation document with the Indiana Secretary of State's office. This is usually called the Articles of Incorporation of the nonprofit that describe and define the organization and its activities.
In Indiana, every Articles of Incorporation document must include certain elements:
- Name of the corporation.
- Statement of the type of nonprofit the corporation will be: public benefit corporation, religious corporation or mutual benefit corporation.
- Street address of the corporation's office and the name of its initial registered agent.
- Every incorporator's name and address.
- Statement of whether or not the organization will have members.
- Provisions regarding procedures for disposing of assets when the corporation dissolves.
Each of these elements have some regulations involved. For example, the church's name cannot be the same as another Indiana business, nor can it be so close to another business' name that it may be deceptive. And state law also mandates that the nonprofit corporation name must include the terms, "corporation," "incorporated," "limited," "company," or an abbreviation of one of these.
Listing the Directors
In Indiana, a church cannot have just one or two directors; there must be at least three directors listed who have agreed to serve. The procedure for disposing of assets must state that remaining assets will be given to another nonprofit. Note that the articles will serve as the "constitution" for the church. They need to include basic information, and name an individual to receive future correspondence from the state.
Articles of Incorporation Forms
The Indiana Secretary of State provides a template for this document that can be filled in on its website and used to create and mail the articles of incorporation. There is a fee for filing these with the Indiana Secretary of State, which is currently $50 if the application is mailed, and $30 if it is filed online.
However, this fill-in form doesn't necessarily meet the federal tax-exempt status requirements. A church must include specific provisions in its articles to meet the IRS requirements for Section 501(c)(3) tax-exempt status. For IRS purposes, the articles must include:
- Statement of purpose that qualifies for federal tax-exempt status.
- Statements that the church won't engage in any type of prohibited political or legislative activity.
- Dissolution of assets provision that specifically dedicates remaining assets to another 501(c)(3) organization upon dissolution.
Indiana Forms: Church Bylaws
After the Articles of Incorporation have been drafted, finalized and filed, the church must write bylaws to describe the procedures for operating the church. These bylaws are the rules that the directors will use to govern the church.
Although these need not be filed with the state of Indiana, they are required by Indiana law and care should be used in drafting them. It is best to get help from someone who understands the federal and state laws about tax-exempt corporations.
Federal Tax-exempt Status: Form 1023
At this point in the incorporation process, the church has been formed as a nonprofit in Indiana. Next the directors must file for federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. This law gives a nonprofit formed for a religious purpose relief from federal income taxes. At the same time, this status allows individuals who donate to the church to deduct their donations from their income for tax purposes.
The church directors must file a form with the IRS called Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. A church can use Form 1023 or 1023 EZ and must file the form together with a certified copy of the church's Articles of Incorporation.
The form seeks details about the church's past and present activities, as well as proposed future activities. It also includes details about financing. The EZ version is a shorter application form that can only be filed online and is only available for the use of certain, small organizations.
Indiana State Exemptions
Once the IRS approves the Form 1023 application, it notifies the church by sending a confirmation letter, or letter of determination. At that point, the church must go back to the state to seek state tax-exempt status. States can exempt nonprofits from income, sales and property taxes.
Most states do not require any additional filings from the church at this point, recognizing the federal letter of determination. However, a few states have their own requirements at this stage, including Indiana. Indiana requires a Nonprofit Application for Sales Tax Exemption form number NP-20A in order to obtain a sales tax exemption.
Since property taxes are imposed and collected on the local level, the church must file Form 136 with the County Assessor in the county where their primary office is located. Along with this, the church should file copies of the Articles of Incorporation, the bylaws, and the IRS determination letter.
Indiana Business Licenses
Some states require that nonprofits apply for and obtain a statewide business license. However, Indiana is not one of them. But while a church need not get a statewide business license in Indiana, it may need to obtain local licenses or permits. This depends on the church's location and the services it provides. A municipality or county official should be able to advise about what is required.
The church should also file a Business Entity Report with the Business Services Division of the Indiana Secretary of State. There is a filing fee of about $20 for this report. It must be filed at the end of the anniversary month one year after filing, and every other year after that. For example, if a church incorporates in February 2021, the first report will be due by the end of February 2022, with the second report due by the end of February, 2024.
Teo Spengler earned a JD from U.C. Berkeley Law School. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an MA and an MFA in English/writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.