Funding the programs of a church takes careful planning. Increasingly churches and other charities consider engaging in activities which may constitute unrelated businesses, for the purpose of generating income which can fund other programs. One way to increase a church’s income and avoid directly paying income tax on for profit business is by creating a tax-paying, for-profit corporation which is fully owned by the church. The law in this area is very complex, and should only be considered with the advice of counsel experienced in this area.
Church leaders must understand what happens when churches own a business. If not done correctly, a for profit subsidiaries may jeopardize the church’s tax-exempt status.
The Intersection of Nonprofit and For-Profit
A nonprofit’s income-producing activity may be considered taxable unrelated business income if:
- It is considered a trade or business,
- Such business is “regularly carried on,” and
- The business is not “substantially related to the organization’s exempt purpose.”
However, unrelated business income may not be taxable if:
- Volunteers performed most of the work, or
- The members’ convenience is the primary reason for the income-producing activity, or
- The business sells items that were donated, for the most part.
Nonprofit organizations can create for profit subsidiaries to carry out the taxable activities they undertake. Even churches are allowed to do this. The subsidiary would be a separate legal entity from the church. The church would be issued shares in the new corporation, then receive dividends or other distributions from the subsidiary. If your church wants to engage in income-producing activities, discuss the way to approach this opportunity with an attorney who understands nonprofit law.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 689-0437 or reach out to us through our contact page.