12 Aug 2009

Can Our Church Own a Business?

Raul Rivera

I recently received an email from one of our readers asking if their church could own a business.  Someone wanted to donate a business to the church, but the reader didn't know if the church was even allowed to own and operate a business that would bring the church income.

In short, the answer is yes.  The church is allowed to own a business that generates income for the church.  I have always encouraged churches to actively pursue sources of income outside of the tithes and offerings.  In today's changing times, opportunities for churches to create alternative sources of income abound.  These range from bookstores to day care centers, culinary schools to financial training.  Churches are beginning to invest some of their time into building income outside of the traditional.  Below you will find four examples.

Example 1:  Mr. X owns a hair salon and he wants to donate it to the church.  Church XYZ receives the salon and Mr. X gets a tax deduction.  Church XYZ converts it to a cosmetology school.  The school grows and generates income for the church through two streams; tuition and nominal charges to the general public to get their hair styled by trainees. 

Example 2:  Mr. and Mrs. Y donate a restaurant to Church XYZ.  The church coverts it to a culinary training school and generates income from tuition and restaurant food sales.  What makes this avenue attractive is that the restaurant sales are generated by the students cooking and serving.  Payroll costs are almost non-existent.

Example 3:  Church XYZ starts a day care center in a rented facility.  It is run by one employee and many volunteers.  The daycare has a goal to disciple children and currently has 62 children enrolled, generating significant revenues for the church.  One year later, the day care center offers a breakfast and dinner program, as well as a dry cleaning facility for parents to drop off clothes at the beginning of the day.  Revenues sky rocket and the pastor no longer has to rely solely on tithes and offerings to pay the church's bills.  Our book, How To Start a Day Care, shows you just how little the initial investment is!

Example 4:  Church XYZ has several talented graphic design artists and tailors who have experience in design apparel manufacturing.  The church decides to tap their talents, which the artists initially volunteer, and so begins a clothing line that is thematically consistent with the church's vision and purpose of winning the lost.  In its first year, the clothing line does not make any profit.  However, in the second year, they get into several bookstores and make a profit of $15,500.00.  They are now looking to expand their brand nationally.

I could give you many more examples on how a church can generate income in addition to tithes and offerings, bake sales and donations, etc.  When a church develops multiple income streams, it breaks away from the traditional and also sets an example to its membership that is worthy to be duplicated.  When a church relies on traditional fundraisers to help meet budget, it limits itself to small thinking and may come across to society as a harmless and irrelevant group of people.  Why depend on old methods when there are new horizons?

Owning a Business Makes the Church Investment Worthy

When a church has two real income streams it brightens the outlook for its financial future.  Moreover, it becomes more investment worthy.  Let me explain.  Because banks are in business to make money, when they consider whether or not they will make a loan to a church they look at it from the perspective of whether or not the church can repay the loan.  Banks are leery of churches who only have income through tithes and offerings.  History has shown that this type of income can be unreliable. However, if they see that the church has other sources of income, they are much more inclined to give them a loan.  They also love financing projects that will generate more income.  Let me give you an example.

Church XYZ has $430,000.00 in its savings account from income that it made over a period of 9 years from its day care.  The church has been wanting to build new facilities that will house both the church and the day care.  The new plans will double the capacity of the day care.  The church moves its money to a CD paying 2% per year.  The pastor then negotiates a deal with the bank to loan the church the first $430,000.00 at 3%, secured by the CD.  In essence, the church receives a loan of $430,000.00 at a net interest rate of 1%.  Having cash in the bank not only makes it investment worthy, but it also gives the church leverage to negotiate more favorable rates based on brick and mortar income and not just the charismatic personality of a great pastor.  After negotiating the first loan, the church then applies for a construction loan for the rest of the money needed to finish the building.  The bank approves it up to $1,000,000.00 at 4.24%.  Bottom line:  the church gets a brand new sanctuary and facilities because the day care made it investment worthy.  It is easy for a bank to approve a loan when the church makes $50,000.00 in positive cash flow from its day care on an annual basis.

What about taxes?

When a church makes money from other business activities, there is the possibility that the church may have to pay tax on the profits.  This tax is known as "unrelated business income tax (UBIT)."  Many churches are under the impression that because the church may have to pay a tax, it cannot own or operate a business.  This is a misconception.  If a church engages in business activity that incurs UBIT, all it has to do is simply fill out Form 990-T each year and report its income and pay whatever tax is due. 

In order for a church to incur UBIT, it must determine if it has earned income from unrelated activities.  This can prove a little difficult sometimes.  Section 513(a) of the Internal Revenue Code defines Unrelated Business Income (UBI) using three key phrases as follows:

  1. Is the income substantially related to the church's religious, charitable, educational or other purposes?
  2. Is it a trade or business?
  3. Is it regularly carried on?

These three components must be present in your church owned and operated business before it becomes taxable.  Of the four examples above, which do you think will be taxable?  It is possible that none of them will be taxable.  It all depends on the church's incorporation and application for 501(c)(3) status.  Is the activity covered?   That is why incorporating and obtaining 501(c)(3) status is more than just filling out forms.  It's about building a strategy that will allow the church to operate effectively and allow growth into other areas that may present themselves in the future.

The Challenge

Please let this article challenge your thinking.  Try to think outside of the box.  Please feel free to leave comments on business ideas that you may think are fruitful for others to consider.  Maybe you have an idea that another reader can take and implement into his or her church.

Learn More At One of Our Conferences!  Register Now!

Why having a church business is one of the best financial moves, your ministry can make. Most churches and ministries do not have other sources of income to fall back on when times get tight. in today's tough financial market, churches are reinventing the way they manage finances.

How to avoid the 10 most common IRS pitfalls. These are the areas you are most likely to be in noncompliance, and they have the most potential to wreck your day.

How managing your church benevolence program according to Income Tax Regulation 1.170A-4A(b)(2)(ii)(D) and Revenue Ruling 56-304 can save your church's tax exempt status.  Many churches have benevolence programs, most of those programs are in danger of causing the church to lose its tax exempt status because they are being conducted according to the requirements of the law.

The potentially devastating consequences for violating code Section 4958, and how it could cost your church corporately, your trustees individually and even your church members! Sound scary? It is, but you do not have to be at risk. We will make sure you know what to change to be in compliance.

The fact is that most churches violate code many sections of the IRS code without knowing it. Odds are, you are one of them. Ignorance to the law is inexcusable to the IRS. God is gracious, but the IRS is not! The good news is, you can learn how to fix it all.

Rules for board of directors require a balanced board. Each member must sign a declaration stating their active participation as well as having equal voting power among the others. Learn the other rules for board members. Register Now!

Sign up for our Newsletter

And receive our free eBook Sequence: A step-by-step guide to successfully launching your church.

About the Author

Church Planter. Speaker. Author. CEO. Raul Rivera has had ample experience in the church planting world. His current venture, StartCHURCH, has helped 1000's of churches to start right. Raul has compiled an array of manuals and software tools that help churches stay compliant with the IRS. He also hosts over 35 national conferences per year, training pastors on how to launch their churches. Raul is married to his wife Genel, and they and their five children live in Atlanta, GA.