Establishing Affiliate Church Ministries Stephen M. Clarke Stephen S. Kao Gammon & Grange, P.C. Legal Wake-Up Call January 14, 2004

1/14/04 © 2004 Gammon & Grange P.C Hypothetical—Church Pre-School A church has begun a pre-school during the week for 30 children from the church and the community. The pre- school meets in the church’s facility. The church pays part-time staff to teach and administer the pre-school. The church Board is considering a separate corporation to run the pre-school in a separate facility, because it is concerned about potential liabilities from the ministry. Also, some parents in the community are reluctant to send their children to a “church” pre-school. What factors should the church consider before spinning off the pre- school into a separate organization?

1/14/04 © 2004 Gammon & Grange P.C Hypothetical—New church Plant A non-denominational church in Fairfax County is in the process of planting a church in Loudoun County. The two churches share office staff, and the parent church’s assistant pastor is planning to split his time between the two churches (the new church will have a new senior pastor). The parent church wants to maintain close ecclesiastical control over the new church. What factors should the parent church consider before spinning off the new church into a separate entity?

1/14/04 © 2004 Gammon & Grange P.C Reasons for Establishing a Separate Affiliate Ministry Isolating liabilities of higher risk activities (e.g., counseling center, child care, mercy ministry) Activity is outside scope of Church’s purposes or mission Unrelated business activity (e.g., restaurant, barber shop) and UBIT concerns Need to generate capital for activity, receive government, corporate, or private funding Need to attract separate set of Board members Desire for different organizational structure Public perception; cultural considerations

1/14/04 © 2004 Gammon & Grange P.C Reasons Not to Establish a Separate Affiliate We can effectively manage liability risks with other risk management means, such as insurance We want to maintain direct control over the program, assets, and personnel involved There are no adverse tax implications A separate Board is not needed to attract qualified directors for the ministry We want to avoid the costs and obligations involved in starting a new organization Legal exemptions available to churches may not be available to separate affiliates

1/14/04 © 2004 Gammon & Grange P.C Organizational Considerations Structure: for-profit or nonprofit? Governance control –Appt. of some or all Directors –Approval of certain decisions (purchase or sale of land; amendment of Articles, Bylaws) –Directors’ subscription to Statement of Faith Contractual control (affiliation agreement) –Transactions must be at arm’s length –Sharing of personnel, facilities, and other resources should be documented –License of name or other intellectual property

1/14/04 © 2004 Gammon & Grange P.C Legal Organization Articles of Incorporation Bylaws Federal employer ID number Bases for tax exemption –Integrated auxiliary –Group exemption –Stand-alone 501(c)(3) –Supporting organization (509(a)(3)) –Property title-holding org. (501(c)(2)) –Lobbying/social welfare org. (501(c)(4)) Application for tax exemption Internal policies

1/14/04 © 2004 Gammon & Grange P.C Obligations of Maintaining Affiliate Organization Regular meetings of an independent Board of Directors State filings (annual reports) State registrations (sales tax, solicitations) Form 990 filing (if affiliate is not a church, an integrated auxiliary of a church, or under a church’s group exemption) Regular activities, separate from church Separate accounts, financial books, and records

1/14/04 © 2004 Gammon & Grange P.C Managing potential liabilities to maintain corporate firewall Faithfully follow corporate formalities –Separate Board meetings –Minutes of meetings –Separate accounts, books, and records –Document inter-organizational transactions Engage in and document arm’s length transactions –Subleases –Resource sharing agreements –Subgrants Conflicts of interest policy

1/14/04 © 2004 Gammon & Grange P.C Hypothetical 1—Church Pre-School A church has begun a pre-school during the week for 30 children from the church and the community. The pre- school meets in the church’s facility. The church pays part-time staff to teach and administer the pre-school. The church Board is considering a separate corporation to run the pre-school in a separate facility, because it is concerned about potential liabilities from the ministry. Also, some parents in the community are reluctant to send their children to a “church” pre-school. What factors should the church consider before spinning off the pre-school into a separate organization?

1/14/04 © 2004 Gammon & Grange P.C Hypothetical 2—New church plant A non-denominational church in Fairfax County is in the process of planting a church in Loudoun County. The two churches share office staff, and the parent church’s assistant pastor is planning to split his time between the two churches (the new church will have a new senior pastor). The parent church wants to maintain close ecclesiastical control over the new church. What factors should the parent church consider before spinning off the new church into a separate entity?

1/14/04 © 2004 Gammon & Grange P.C Resources Gammon & Grange, P.C. Nonprofit Alert®, Subsidiaries and Nonprofit Affiliates—see Church planting links (MisLinks): National Association of Church Business Administration ( Christian Management Association Christian Ministry Resources:

1/14/04 © 2004 Gammon & Grange P.C IRS Approval of Seminary’s Scholarship Program Purpose: to provide practical stewardship/ fundraising training to recipients Applicants must identify a sponsoring church and 12 potential donors to program Scholarship recipients must take a class in Christian stewardship/fundraising Recipients must help solicit pledges from 12 donors, using principles learned in program Recipients’ scholarships are not contingent on recipients’ success in securing pledges

1/14/04 © 2004 Gammon & Grange P.C Tax Deductibility of Contributions to Scholarship Program Preserving tax deductibility of donations of friends and family members of recipients –Contributions are designated for scholarship program, not for individual students –Contributions are placed into a pool of funds used for scholarships and program expenses

1/14/04 © 2004 Gammon & Grange P.C IRS Ruling on Partnership Scholarship Program Scholarships are “qualified,” or excludible from income of recipient, for tax purposes –Scholarships are paid primarily for benefit of students, not seminary –Any services provided by students to seminary (e.g., fundraising) are incidental to educational purpose of program

1/14/04 © 2004 Gammon & Grange P.C A Different Perspective…. William Hamilton quote: “It strikes me as singularly inappropriate for a school to use its students for fund- raising. It reminded me of the first time I saw a gypsy mother send her baby out to beg.” “It strikes me as singularly inappropriate for a school to use its students for fund- raising. It reminded me of the first time I saw a gypsy mother send her baby out to beg.”

1/14/04 © 2004 Gammon & Grange P.C Questions & Answers Hypotheticals Reasons for Establishing a Separate Affiliate Ministry Reasons Not to Establish a Separate Affiliate? Organizational Considerations Legal Organization Obligations of Maintaining Affiliate Organization HypotheticalsResources IRS Approval of Seminary’s Scholarship Program Partnership Scholarship Program IRS Ruling on Partnership Scholarship Program A Different Perspective