Should Your Church Create Separate Nonprofit Organizations for its Ministries?
A growing trend for churches across the country is to create separate 501(c)(3) organizations for some of their ministries. Many churches today operate day care centers, schools, and other programs that further their mission. It is important for churches to know that they have the option of setting up these ministries as separate nonprofit organizations and understand the practical steps to do so.
Generally speaking, the benefits of creating a separate 501(c)(3) entity for certain church ministries are twofold. First, churches should consider establishing separate 501(c)(3) organizations for ministries that contain a high risk of liability. These types of ministries include schools and day cares. It should come as no surprise that schools and day cares have a higher risk of liability than other ministries, such as a food pantry. After all, churches that operate schools and day cares are more exposed to certain liabilities and lawsuits including employment disputes, child abuse, or personal injury. These types of lawsuits can be crippling for any church. By placing the school or day care into a separate nonprofit entity, a church can better protect its assets from any liability from the actions of the school or day care.
A second potential benefit is the ability to attract additional funding, personnel, or volunteers. Certain donors may strongly support the education a school provides but be reluctant to give directly to a church. In fact, certain organizations have policies that prevent them from giving grants directly to religious organizations. Incorporating as separate entity is one way struggling ministries could attract new forms of income.
Churches should also consider potential downsides. First, costs and legal fees for setting up a nonprofit entity and obtaining 501(c)(3) status with the IRS generally run around $5,000. The creation of a new nonprofit entity would also require additional administrative work and compliance with reporting requirements. For example, all 501(c)(3) organizations, with the exception of churches, are required to file 990's annually. There are also state compliance and reporting requirements. Another potential downside of creating a separate entity is that members of the church may begin to think that the ministry is no longer their concern. If others from outside the church begin sustaining the ministry, members of the church may consider shifting their time and resources to other endeavors. Churches should be careful to stress that the ministry is still the work of the church.
Related to that point is the risk of losing control over the vision of the ministry. All faith-based organizations eventually face the prospect of mission drift. Sadly, many organizations, colleges, or corporations that began as faith-based institutions no longer reflect their founders’ values. Churches can guard against this by maintaining control over the new entity in its governing documents. These documents should specify that the church has the authority to appoint or remove officers and directors as well as having certain control over the finances.
Churches should also be aware that as separate entities, their ministries may not be considered part of the church for zoning purposes. Churches should review the zoning implications of creating separate nonprofits and understand that certain federal protections, such as the Religious Land Use and Institutionalized Persons Act, may not apply to protect their ministries if there is a zoning dispute.
Churches that are interested in exploring these options should contact legal counsel. Mauck & Baker attorneys can assist you in determining whether these actions are right for your church. Attorneys can also identity other issues that churches may not be aware of and provide ongoing guidance to make sure any new nonprofit entity operates legitimately. While the church can and should exercise oversight over the new entity, it must have its own funds, insurance, accounts, and run its own day to day operations. In addition, if the new entity does not conform to a church’s mission or purposes, the church’s governing documents may need to be amended. Mauck & Baker attorneys can assist in ensuring that separate 501(c)(3) entities are properly set up and further guide churches to ensure that they remain legally compliant.