What are the differences between a Corporation Sole and a 501(c)(3) non-profit?
A Corporation Sole is also a non-profit, and if it is based on a true church or spiritual organization, does not pay tax on spiritual activities. A 501(c)(3) church obtains tax-exempt status by asking the IRS’ permission, and the IRS typically applies a 14-point test that is based on a traditional corner church. A Corporation Sole, on the other hand, is based on Internal Revenue Code section 508(c)(1)(a), which creates a mandatory exception for a church. There is no long application to the IRS, or answering dozens or hundreds of questions. Still, there must be a legitimate church or spiritual organization in order to be tax-excepted.
Additionally, a 501(c)(3) is usually organized as a non-profit corporation, and thus must follow State laws that usually require three Directors. Federal law specifically requires three or more Directors for a non-profit corporation. Thus, there are required meetings, minutes, and Resolutions. A Corporation Sole, since it is an office held by one person, has no required board of directors, meetings, or Resolutions.
Can I as an individual be a Corporation Sole?
No. First, a Corporation Sole is not a person, it is an Office, filled by a person. Second, a Corporation Sole is the asset-management arm or vehicle of a church or religious society, so there must be at least three people who sincerely hold the same spiritual or religious beliefs and practices.
Does my family qualify as a “church or religious society”?
The answer to this is … possibly. The fact is if you have a church and the only members are your family members, the IRS will probably not be impressed should they ever investigate you. Also, if you try to put personal possessions or your family home into the Corporation Sole, or try to claim that you don’t owe taxes on personal income, then you will be operating illegally. All non-religious business activity is taxable, and tax returns must be filed. Since your Corporation Sole is filed with the State, it is subject to State as well as Federal law. You must be in compliance with all laws. That being said, if some of your family members truly hold the same spiritual beliefs and ministry goals, and come together to form a church, religious organization or charitable ministry, allow other like-minded people to join, and only apply the Corporation Sole to religious activities, then … yes, that could qualify. In this case there is a possibility to have a Corporation Sole.
Can a Corporation Sole protect my assets?
The key word here is “my.” If you truly give assets to a church, they are no longer yours. If you place a car into the Corporation Sole, and then only use it for yourself – for personal and business as well as church purposes, then the IRS or a court would probably consider it to still be your car. If you truly place assets into the church, for the exclusive use and benefit of the church and all its’ members, then there can be asset protection as far as a lawsuit against you personally. If the church itself is sued, church assets can still be reached by creditors or people harmed by the church. Thus, there can be some protection, but it is not complete
Is the Corporation Sole automatically tax-exempt?
A Corporation Sole is not in itself tax-exempt. IRC Section 508(c)(1)(a) states that a church is excepted from tax payments. Remember that there are two entities – (1) your church/spiritual organization; and (2) the Corporation Sole. The Corporation Sole is the Office, filled by the head of your church or order, who manages the assets of the church. Thus, technically, the assets and activities of the church are tax-excepted, and the Corporation Sole is simply the management arm of the church.
Can a Corporation Sole own and manage businesses, and not pay taxes on the business income?
No. Any non-religious business activity must be reported and the tax paid. A Corporation Sole can certainly own a business, yet there are many rules and laws that must be followed.
Can I receive tax-free income as a minister of my Corporation Sole? What about a Stipend and expenses?
As with all churches who pay their ministers a salary, the salary must be reported and tax paid. However, the Corporation Sole can pay for all of your travel and other expenses that are part of your spiritual service, can pay a Stipend (basic living expenses – rent, utilities, food, etc.), and can provide insurance and other benefits. Any payment above those reasonable amounts must be reported as income.
Can I use my CS for estate planning, to leave gifts to my children?
No. The property you place into a Corporation Sole is no longer yours – it belongs to the church, and you cannot take it back. If you dissolve your Corporation Sole, the property must be given to another non-profit. The Corporation Sole is a corporation for holding and managing the property and assets of a church. You cannot mix estate planning in with it. You can, however, name a family member to succeed you as the Officer of the Corporation Sole. They would then have the right to use church property in their spiritual activities. For example, the Corporation Sole can own a house, and that can be the Minister’s Residence, and be part of his or her stipend. Still, the minister can never sell the house and keep the money. With a Corporation Sole, the property is dedicated to the eternal use of the church/spiritual organization, and that commitment must be taken seriously. You are free to own your own property and assets outside the Corporation Sole, and to pass those on to your children in a separate Will or Revocable Living Trust.