New Trend: Church Owned Business

By Tracey Perez

Recently I had a phone call with a pastor in Georgia. He told me about financial issues his church was having during the summer. 

I don't know what else I can do to help keep the church afloat. I’m already donating more of my personal money to the church to help cover the bills. The board and I have decided that it won’t be until next year or the year after that I will begin receiving a salary. Paying for expenses leaves us with less money to actually fulfill the mission of the church. The church’s dream is that we would use our money to feed the homeless and give back to our community. It just seems like we’re spending all of our money on basic administrative expenses. I don’t know what else to do.

This occurs more often than you would think. Accepting the Lord’s call for your life and taking the step of faith to plant a church is very important. The vision He has shown you for His church is important. Knowing that God’s vision for the church is being limited because of lack of money is frustrating. 

I didn't want him to feel frustrated. I asked him, “Are you currently selling anything before or after services?” He told me that they weren't, but that the church had a cafe where they give out coffee to the congregation as part of their church fellowship. At that moment, I was eager to introduce the idea of starting a for-profit arm.

What is a for-profit arm?

A for profit arm, also referred to as a feeder corporation, is a lawful business that is owned by one or more nonprofit organization(s). This for-profit arm generates funds and distributes it to the majority shareholder (church) in the form of a dividend. 

A for-profit arm is set up and incorporated separately from your ministry. It will operate independently from your church and will have its own board of directors, bylaws, Federal Employer Identification Number and distinct for-profit purpose. Once incorporated, the business and church will enter into a stockholder agreement, and the church can purchase shares. 

How will a for-profit arm help the church generate funds?

Dividends 

One important thing to keep in mind is that the for-profit arm will still generate profits/losses, incur expenses, and report and pay taxes just as any other business. 

After the business’ expenses, taxes, and investments have been deducted, the remaining profit will be paid to the business’ shareholder(s) in the form of dividends. The great thing about this is that these dividends are considered passive income for the church, meaning that the church does not have to report them as unrelated business income. 

Unrelated Business Income  

What is unrelated business income (UBI)? If the church were to engage in similar profit-generating business activities like the for-profit arm, it would be engaging in unrelated business. Unrelated business, according to section 513 of the Internal Revenue Code, is: 

any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501

This means that any income-generating activity of the church that falls outside of its charitable purpose is considered unrelated business income. The church would need to pay unrelated business income tax on the income thats generated from that activity. If the income generated by this activity is a substantial amount, compared to the total income of the church, then the church’s tax-exempt status may be at risk of being revoked. 

That is the beauty of starting a for-profit arm: you don't have to worry about unrelated business income tax. It’s important to know one of the expectations the IRS has for you as a nonprofit organization. As mentioned earlier, the benefit of setting up a for-profit arm is that you will still be able to conduct business activities that will help generate funds for the church, without the risk of potentially losing the church’s tax-exempt status. 

Other Benefits

Two other benefits to having a for-profit arm set up are:

1. The church can use the property and assets of the for-profit arm for free.
2. The corporation can take on a religious persona which helps protect the business’ decisions. This means that your for-profit arm can still uphold your church’s deeply-held religious beliefs. 

A for-profit arm in action

A church we recently helped owns a for-profit catering business that caters gourmet food at special events like birthdays and weddings. In the bylaws of the business, an article was inserted that prohibits the corporation from condoning, promoting, or allowing any of its assets to be used for activities that violate the majority shareholder’s written doctrines. This church was opposed to homosexual marriage and had language stating so in its written doctrines. The catering business also is protected by that language. Therefore, if the business were to be solicited by a homosexual couple to cater their wedding, the catering business could deny the request on the basis that it would violate their bylaws.

Many of you may have heard about a case in Colorado where Jack Phillips refused to make a wedding cake for a same-sex couple. The Supreme Court ruled in favor of Mr. Phillips and set a precedent for for-profit arms to be able to operate and still uphold the church’s beliefs. If you want to read more about this case, click here. 

Parable of Talents

“For it will be like a man going on a journey, who called his servants and entrusted to them his property. . . When the master returned, the two men who had turned around and multiplied the talents pleased the master. Because he was pleased, the master said, “Well done, good and faithful servant. You have been faithful over a little; I will set you over much.” (Matt 25: 14-21)

After hearing this, the pastor told me he wanted to know if we could help with setting up a coffee shop. He knew that this would be a perfect way to generate money for the church! I told him of course we could. StartCHURCH sets up dozens of for-profit arms each year. He thanked me for the information and explained that he had been asking the Lord for help and direction with the church finances.

The church has the ability to take what the Lord has given it and turn around and multiply it. The best part about the whole process is that this actually pleases the Lord! If you find yourself in a similar season and want to start taking advantage of this opportunity, feel free to reach out to us at 770-638-3444. 

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