Many churches consider branching out to serve areas of need within their communities. They may do so by opening a second-hand store or a food bank for those hit especially hard by the economy.
Perhaps they start a preschool that serves special needs children or those from non-English speaking homes. Whatever outside ministry a church chooses to set up, there’s always the question of what’s involved in forming an organization that’s separate from the daily operations of the church.
For some ministries, including an affiliated organization in its larger corporate structure may be the answer. Such an entity can provide many benefits for the ministry’s operations, as well as a layer of legal protection. An affiliated corporation can be managed by a board of directors who are skilled in and able to exclusively focus on certain aspects of the ministry—fundraising and investment management, for example. This allows the ministry to focus on its main objectives and activities. Another advantage is that the assets held by an affiliated corporation may be shielded in certain circumstances from the legal claims against the ministry itself.
A ministry should discuss whether it has coverage for an affiliated organization with its insurance agent.
When determining whether it would be wise to establish an affiliated organization, ministries should carefully consider additional costs and administrative duties associated with the task. Expenses can include:
Then think about the additional administrative duties:
Once organizers consider these items, they should work with a local attorney and tax professional to determine what type of affiliated organization would be most beneficial to their church. Two of the primary types of organizations that ministries often set up are 509(a)(3) and 501(c)(2) organizations.
509(a)(3) Supporting Organization. Known also as “supporting organizations,” 509(a)(3) organizations carry out their exempt purposes by supporting other exempt organizations. A 509(a)(3) supporting organization must meet all of the following tests to qualify:
Be aware that 509(a)(3) supporting organizations are limited in the types of fundraising they can use. For example, they’re not permitted to establish pooled income funds and they have a limited ability to accept donor-advised funds. If a ministry wants to use either of these fundraising methods, it’s likely they will have to conduct the fundraising through the ministry itself, rather than the supporting organization.
Consult with a local attorney or tax professional to determine what fundraising methods are available to one of these supporting organizations.
501(c)(2) Title Holding Corporations. Another type of affiliated organization that many ministries find advantageous is a title holding corporation, organized under section 501(c)(2) of the Internal Revenue Code. It’s also exempt from federal income tax.
A title holding corporation owns the legal title to the ministry’s property, while the activities and operations of the ministry are carried out separately. Property that can be held by a title holding corporation include:
One distinctive advantage of a title holding corporation occurs if a ministry is sued—the party trying to collect from the ministry will have difficulty reaching the assets held by a title holding corporation.
Donations to an exempt 501(c)(2) title holding corporation usually are not considered charitable contributions on a donor's federal income tax return. Therefore, if a ministry forms such a corporation, members should not give tithes and offerings to it. Instead, donors should make their contributions directly to the church or ministry. Discuss all this with a legal or tax professional before you establish a title holding company.
A ministry should discuss whether it has coverage for an affiliated organization with its insurance agent. Some affiliated organizations may qualify for coverage under an existing insurance policy. Others may require a separate policy. To qualify for coverage under an existing Brotherhood Mutual policy, the affiliated organization must meet the definition of a “related organization,” which has the following characteristics:
Ministry bylaws or other organizational documents can be used to show that these characteristics exist. Provisions in these documents that can help establish the “related organization” status include:
Whether and how the creation of an affiliated organization will work for your ministry depends upon a number of factors. You should pursue establishing such an organization only after careful consideration and consultation with your ministry’s attorney and tax professional. The IRS provides additional information online that can help churches and ministries determine the type of affiliated organization that may be best for them.
Thank you for your interest in Brotherhood Mutual. We appreciate the opportunity to provide your church or other ministry with an insurance quote and will reply to your request as soon as possible.
Text to follow...