Wednesday, July 19, 2006

Should a Church School Be Separately Incorporated?


I receive numerous telephone calls every day from Independent Baptist pastors all around the country. Each pastor is an individual with beliefs which may differ from mine in some respects. The purpose of Lighthouse Legal Ministries is to defend your religious beliefs, not mine.

I have received a couple of telephone calls recently from Independent Baptist preachers who are considering something new -- separately incorporating their church school.


Now, let me make it clear. Most Independent Baptist church schools are not separately incorporated because the church holds the belief that the church school is an integral and inseparable ministry of the church, just as Sunday School or Junior Church is; no Baptist church would even dream of separately incorporating those latter ministries.


Is there any advantage to a Baptist church in separately incorporating the church school?
• Perhaps the church wants to shield itself from liability associated with operation of a church school. However, if the church continues to control the church school, the church would find itself still liable.
• Perhaps the church wants to establish different benefit programs for the school staff. Since there is such a variety of benefit programs in our churches, I could not comment generally on that issue.
• Under President Bush, faith-based initiatives have resulted in the government throwing millions of dollars at religious organizations. In 2005 alone, over $2 billion was given to such religious organizations, none of which, by definition, could be given directly to churches. However, separately incorporated religious organizations, including schools, would be eligible for grants. My position with regard to churches or church schools seeking governmental aid has been clearly expressed in previous blogs.
• Some churches which would never accept government grants would nonetheless seek funding from private sources. Such an approach does not violate our Baptist belief in separation of church and state. In some instances, the private donor will only make contributions to a non-church organization. In such a case, that church might consider separately incorporating the church school.

IRS FORMS 1023 AND 990

If a church decided to separately incorporate its church school in order to receive either government or private grants, the church school would have to be incorporated as a nonprofit organization in its state; then the separately incorporated school would file Form 1023 with the IRS in order to obtain tax exempt status. Filing incorporation papers is fairly easy and cheap, whereas filing Form 1023 costs hundreds of dollars and takes 6 to 12 months to accomplish.

Most tax exempt nonprofit organizations also have to file an annual Form 990, which goes into great detail in the organization's leadership and finances. For that reason, churches have always been exempt from filing Form 990. But are church schools exempt?


In a recent ruling (IRS Private Letter 200615027), the IRS ruled that a separately incorporated, church-controlled private elementary and secondary school was exempt from federal income taxation and exempt from filing Form 990.

The IRS Code not only exempts churches but also "an educational organization (below college level) that has a program of a general academic nature, and that is affiliated with a church or operated by a religious order." In the case of a separately incorporated church school, it is "affiliated" with a church, convention, or association of churches if it is "operated, supervised, or controlled by" that church, convention, or association of churches.

In the event that your church considers separately incorporating your church school, please assure that the following IRS guidelines are met:

1. The school was created to further the religious purposes of the church by providing education consistent with the church’s religious teachings.

2. The spiritual teachings and virtues of the church were incorporated into all aspects of school life.

3. The school conducted mandatory weekly worship service for all students.

4. The church controlled the school’s board of directors.

5. A majority of the school’s board were required to be members of the church.

6. Admissions literature clearly identified the school’s relationship with the church.


If your church school can’t meet the above requirements, you probably shouldn’t be operating a church school anyway. If you have any questions or problems, please do not hesitate to call LLM Attorney Terry Lee Hamilton at 440-964-0236. God bless you!