3 Strategies You Need to Navigate Your Church
By Raul Rivera
Pastor Alexander was up all night. He knew worry was not of God, but numbers and phone calls and decisions had played over and over in his mind, robbing him of sleep as he lay trying to figure out how to fix the mess his church was in.
His ministry had just finished a large fundraising campaign to help meet the ministry’s growth and outreach goals. The church board and ministry leaders felt the need to start gang prevention outreaches in the city and to find ways to help better the economic situation of their region. They had planned a great community center and restaurant business model they knew would work if the funds were there. But now that the donations had come in and the church could start implementing the plan, Pastor Alexander had many more questions than he could answer.
Could the church handle the burden of carrying out such a large outreach plan and manage a business at the same time? Could churches even run businesses? A board member who had done some research on the topic had mentioned that churches could lose tax-exempt status for operating a business...so, how did those bigger churches do it?
And how would he protect the church’s assets if someone fraudulently sued them? Just a month ago, a pastor friend of a flourishing church in another state had been sued by people who seemed to only want to take advantage of his church’s new wealth.
Just when things were turning around for Pastor Alexander’s ministry, unexpected roadblocks and new fears arose. At the end of his rope, Pastor Alexander called StartCHURCH for help and was relieved to find out that he was not alone.
It is a common story
The fictional story above is not a new one; in fact, it is the story of several pastors who contact StartCHURCH on a daily basis. With great wealth comes great responsibility, and church leaders all over the nation are daily faced with the conundrum of how to wisely uses the resources of their churches to bless the community, care for the members, and protect the assets of the ministry from wolves in sheep’s clothing.
There is a solution
Pastor Alexander faced three main issues:
- How to set up a community center without putting a strain on the ministry’s resources, including staff and money.
- Generating continual income to keep the church operations afloat.
- Protecting the resources of the ministry.
At StartCHURCH, we have anticipated the needs of ministers like Pastor Alexander and have created what is called the Ultimate Church Structure to meet those needs. The Ultimate Church Structure combines several corporate structures to sustain, grow, and protect your vision. The Ultimate Church Structure includes 4 components: the church, the community development center, (CDC), the holdings corporation, and the for-profit arm. Let’s look at how the ultimate church structure solves Pastor Alexander’s dilemma and allows him to sleep at night.
The church oversees
The church is the central base of the Ultimate Church Structure. Generally, the vision and funding for expansion and growth comes from the church. It gives oversight to the CDC, protect it’s assets with the holdings corporation, and provides start-up funding and oversight for the church-owned business, which is the for-profit arm. If you operate a religious ministry instead of a church, your ministry can serve as the HQ of the Ultimate Church Structure as well.
The CDC extends the reach
A CDC (community development corporation) is a great way to establish programs to meet the needs of your community. A CDC’s purpose can range from youth programs, low income housing, and transitional housing, to leadership training and development, and more. Setting up a CDC means creating a separate nonprofit entity that can take responsibility for the bulk of the community development efforts that the church would like to engage in, but for which it needs dedicated staff.
The CDC may share board members with the church to ensure continuity of vision. The church and CDC may even share the same facility. A CDC can apply for state and federal grants to operate. Where a church may be ineligible for some grants, a CDC without a strictly religious focus may not be. This does not mean that the CDC does not honor God; you just take another approach to meeting the community’s needs. However, church staff and members may work for and volunteer with the CDC, thus ensuring that the gospel of Christ keeps spreading!
The holdings corporation protects
The holdings corporation is a great line of defense for protecting the assets of your ministry. Congress authorized section 501(c)(2) to allow tax-exempt organizations (such as your church) the ability to take its assets and put them into a holdings corporation that is owned and controlled by the church. In the IRS's EO CPE text of 1986, the top two reasons for a church to put its assets into a holdings corporation are as follows:
- Limitation of liability from potential damage suits, and
- Enhancement of ability to borrow.
When a church properly places its assets in a holdings corporation, it heeds the warning that the Lord gave His disciples, and puts into action a "wise-as-a-serpent" strategy to protect its assets.
In order to most take advantage of the holdings corporation setup for a church, it is best for the holdings corporation to be the legal owner of as many assets as possible, instead of the church. This can be done by simply passing title of the assets to the holdings through an act of the board of directors of the church.
A holdings corporation is permitted to hold title to property of a tax-exempt organization and collect rental income from the act of holding title. This means that though under certain situations a church cannot rent out space to a business, a holding’s corporation can, with no negative repercussions. If the holdings corporations hold’s the church’s assets, including the church building, it can rent out space to the for-profit arm.
The for-profit arm generates funding
Creating a church-owned business is a great way to begin generating tax-free, passive income. Because a church is tax-exempt, it cannot conduct activities on a regular basis that are in competition with other business. Doing so can cause a church to lose its tax-exempt status.
Whenever we discuss the topic of churches owning businesses, a common question that comes up is, "Can a church do that?" My answer is, "Yes, so long as it is done correctly." In order to do it correctly, a new for-profit corporation is established. We call it a “For Profit Arm.” In Section 502, the IRS calls it a “Feeder Corporation,” and describes it as a business operated for the primary purpose of carrying on a trade or business for profit even if the profits are distributed to your church. A for-profit arm is an important part of the Ultimate Church Structure model because it allows you to create jobs that impact the community.
It also generates passive income for the church because after the for-profit arm files its tax return, 100% of the profits that are passed to the church are tax free to the church as a donation. The church can then use those funds however it wishes. Imagine receiving enough cash from your for-profit arm to pay all of the church's bills? That places you in a different level.
And remember, since it is a separate entity, none of its liabilities can fall on the church. One of the greatest legal strategies of the for-profit arm is that it is incorporated as a separate business, which separates the church from any liability or lawsuits against the business, stemming from accidental injury or frivolous attacks.
Conclusion
If you find yourself reading this article and being able to breathe easier, then setting up the Ultimate Church Structure may be the answer for which you have been searching.