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Religious and Secular Nonprofits: What You Should Know

Capell Barnett Matalon & Schoenfeld LLP (“CBMS”) has helped clients form secular and religious nonprofit corporations of all kind. These organizations, if properly created and operated, provide a special value to the public, and their members, if they are established as a member entity.

Depending on their purposes, in the State of New York, these organizations can be established under the Religious Corporations Law or the Not-for Profit Corporation Law.

A nonprofit may conduct no activities for profit or financial gain, except to the extent that the activity supports its other lawful activities then being conducted. If the corporation is created for religious purposes, it would generally be formed under the Religious Corporations Law.

Generally, to support their purposes and goals, these entities seek funding from their members, their community, constituents, the public and federal, state and local governments, either in the form of donations or by applying for grants. In furtherance of their fund raising, it is important for most nonprofits to obtain tax exempt status under section 501(c)(3) of the Internal Revenue Code. To qualify for 501(c)(3) tax exempt status, an organization must be organized and operated exclusively for exempt (charitable or public) purposes and none of its earnings may inure to any private shareholder or individual.

An organization that receives 501(c)(3) tax exempt status is exempt from federal income tax and, with certain exceptions, donors who make charitable contributions to them may receive a deduction for federal income tax purposes. Because of this, loss of 501(c)(3) status can be fatal to the continued operation of a nonprofit.

Though secular nonprofits and religious organizations can overlap in their respective charitable purposes, they have many differences. Even with their differences, all charitable organizations must apply for and obtain a 501(c)(3) exemption to be considered tax-exempt.

Houses of worship, whether congregational or part of a larger denomination, are generally formed under and governed by the Religious Corporations Law. Typically, because of the First Amendment, they are subject to fewer state and federal filing and reporting requirements than many other tax-exempt organizations. There are several steps involved in creating a religious corporation, which include organizational meetings and filing the certificate of incorporation with the county clerk’s office.

While all religious organizations are nonprofits, obviously, the opposite is not always true.

Secular Nonprofit Basics

Secular nonprofits run the gamut from colleges and universities, to hospitals, charitable, scientific, literary, testing for public safety, amateur sports, and the prevention of cruelty to children or animals but they must all serve a cause other than generating profit, and may not distribute any part of the organization’s income to its members. Again, there are several steps involved in creating a secular nonprofit, which include organizational meetings and in many cases filing the certificate of incorporation with the Secretary of State, which has an online database containing information relating to many nonprofits and business corporations or limited liability companies formed in New York. In addition to filing with the Secretary of State, it is often necessary for a nonprofit to file with or obtain approval of other state agencies like the Education or Health Departments.

Generally, these nonprofits must also annually file IRS Form 990, also known as the annual information return, which lists all income and assets and the names and salaries of employees earning $100,000 or more. (While religious organizations are not required to do this, many complete this form to maintain transparency with their members, prospective donors, and the government.)

If you or your organization are interested in creating either type of entity or learning more about them, please do not hesitate to contact us.

A Note on Tax-Exempt and Nonprofit Status

A significant difference exists between the terms “tax-exempt” and “nonprofit.” “Tax-exempt” is a term which the IRS uses to recognize a 501(c)(3) entity, organized and operated for a purpose designed to benefit the public at large. “Nonprofit” is indicative of state law and often, but not always, corresponds to exemption from federal income tax. In other words, tax-exempt organizations are inherently nonprofit in their missions; however, nonprofit organizations are not always tax-exempt because they may not comply with the federal regulations that govern tax-exempt entities or engage in prohibited (though nonprofit) activities, like political activity.

Why You Need a Lawyer

Forming a nonprofit can have as many, if not more, complexities and hurdles as forming a commercial business. No two organizations are identical, and the different requirements for forming either type of nonprofit could be daunting even to an experienced business person.

It’s always wise to retain legal representation when entering any corporate transaction or formation to mitigate risk—financial or other—and maximize mission. CBMS has provided legal expertise to many nonprofit entities during all life cycle stages. You can learn more about our religious and charitable organization practice here. If you wish to form a nonprofit or religious organization, or have legal questions about your current one, please  contact us.