Can Churches Share Their Tax-Exempt Status? Part 1

By Raul Rivera

Many pastors believe that once a church has been established, any ministry started afterward can be “covered” by the church. This is often referred to as the “church umbrella” concept.

When speaking with pastors at our conferences, it is not uncommon to hear a pastor say, “I want to start a new ministry, but I want to do it under the umbrella of our church.” Such ministry may include setting up a community center, an after-school program, a K-12 school, a daycare, or overseeing other church plants.

Although the “church umbrella” is a great concept in theory, without the proper understanding of corporate structure and tax law, you could end up making a big mistake. 

In reality, specific measures must be taken to ensure that you strategically create the correct setup for adding new ministries and outreaches to your church.

What does a church “umbrella” really mean?

This proverbial “umbrella” is an idea that pastors intend to use as a type of “catch all” for his/her vision on a larger scale. A pastor will often sense the urgency for a particular ministry but may not have the time to properly establish the new ministry. As a result, the pastor will offer to “share” the church’s tax-exempt status with another organization. 

What most pastors and church leaders are unaware of, however, is that in order for this to happen, certain IRS requirements must be met. 

Why you cannot simply share your tax-exempt status

It is important to realize that the term church umbrella can be misleading. 

You may be seeking to establish a new ministry that is significant and manageable for your church. Or, you may feel the need to start a new type of corporation altogether to manage the new project. In essence, it is risky for your church to try and “share” its tax-exempt status and FEIN (federal employer identification number) with other corporations.

It is important to realize that the term church umbrella can be misleading.

At best, this process causes one corporation to take full responsibility for another. Thus, the new corporation’s liabilities become those of the original one. At worst, it is a dishonest practice, abusing the system that was set in place to bring great benefits to nonprofits that are administrated properly. 

There is a better solution. Let us examine the corporate structures that you can consider to help birth the new vision God has given you.

3 strategies for your ministry to consider

There are several types of nonprofit corporations and corporate setups that may meet the need of what you are trying to establish. Therefore, you should not ask, “How can I set up this new ministry under the umbrella of my church?” Rather, the best question to ask is, “Based on what we will be doing, what is the best corporate structure I can establish to carry this out?” 

By asking this question, you are better able to determine if a new corporation needs to be formed. Below are examples of common corporate structures that we teach about at all of our conferences. Your church can establish any one of these corporate structures to implement the new part of your vision. 

(Recommended reading: “Do You Know How to Classify Your Ministry?”)

1. Start a CDC

CDC stands for community development corporation. A CDC is a type of nonprofit that focuses on strategies to provide needed resources to your local community to help it grow and flourish. 

A CDC could be formed to establish:

• an after-school program; 
• a transitional housing program for domestic violence victims, ex-convicts, or addicts; 
• a youth mentorship program;
• a community garden;
• life skills classes to promote better living in the community;
• vocational training and job preparation skills classes;
• a thrift store;
• a program to provide meals for children or for the impoverished; and
• a free medical clinic.

These are just a few examples of community development corporations. By creating a CDC, you are forming a completely separate corporation from the church. Your church can, however, provide funding and volunteers to help it get established. It may even share board members with the corporation. 

The important point is that a CDC has a different goal from the church corporation. 

Therefore, establishing a separate nonprofit to carry out community-based, community-focused activities can free the church to focus on the spiritual care of the community while still supporting efforts to meet its other needs.

(Recommended reading: 4 Practical Outreach Ideas with Proven Results”)

2. Start a religious nonprofit 

If you find that your vision is more evangelistic or missions oriented, you may find it best to start a separate nonprofit corporation. 

Creating a separate ministry may be useful when you personally feel called to start a ministry that may not be the mission and vision of your church. Examples of religious nonprofits may be:

• a traveling speaking ministry; 
• a traveling worship ministry;
• spiritual life coaching;
• crusades both nationally and abroad;
• children and teen camp ministries;
• men, women, or youth ministries and support groups;
• missionary training programs;
• a theological seminary or ministry school; and
• a Christian K-12 school.

(Recommended reading: “How to Start a Church-Run School”)

3. Start a for-profit arm

Perhaps your vision revolves around something that is more of a business activity than a charitable activity. You have heard that business related activities can jeopardize your tax-exempt status, and therefore, you may feel a bit stuck.

Well, do not fret. Through a for-profit arm, your church is able to reap the benefits of commercial activities not related to your church’s exempt purpose. Therefore, creating a for-profit arm may be a great option for your ministry. 

In establishing a church owned business, your church can earn tax-free money through receiving donations and dividends from the business.

(Recommended reading: “Can Our Church Own a Business?”)

Expand your horizons

Here, at StartCHURCH, we want to hear about the vision that God has given you and then work alongside you to establish the corporate, legal foundation necessary to make that dream a reality. 

This blog has focused on the various corporate structures available to you, but there is more to be said on this topic. In part 2 of this blog series, we will discuss the misinterpretations of the church umbrella, and how it can affect a church with the vision of planting other churches of similar mission and vision.

If you have not done so this year, I highly encourage you to attend one of our Ultimate Church Structure Conferences to gain more insight and training in how to set up the best plan possible to make your expanded vision a reality. 

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