6 Financial Questions That Trouble Business as Missions

As the concept of Business as Missions (BAM) has become more popular in mission circles, a number of critical financial questions continue to come to the surface. As the two worlds of nonprofit and for-profit collide, the answers to these questions could radically affect the way you approach BAM.

1. Can you use donated money to start a for-profit business?
2. Can employees of mission agencies also run for-profit businesses?
3. Do I have to declare my Kingdom business income in my home country?
4. Can a 501c3 lose its nonprofit status by engaging in BAM?
5. Who owns the profit of my business if/when it is successful?
6. What other financial implications do I need to consider when running a for profit business?

Since there are no definitive answers for many of these questions, my goal is to help you focus your thinking in the right areas and to help you make appropriate decisions regarding each of the issues…

Note: I am not a certified accountant or a lawyer

I will try to present several sides of the discussion to allow you to hear what others are thinking. You can then do your own research and formulate an informed decision. I will also be looking at these topics from the USA tax perspective, so for other nationalities you might find differing answers.

Some of these are serious issues, so please make sure that you do your due diligence and answer these questions for your self, business or organization.

Let’s take look at these 6 questions…

1. Can you use donated money to start a for-profit business?

Since many people called into the life of BAM come through traditional mission organization, they are used to operating in the realm of donations. Some of these people have excellent networks of supporters who are more than happy to help their cause in any way.

As they begin to look at capital costs, they quickly ask, “Where is the world can I raise the money that I need to start my business?”

Since they are accustomed to donations, the first question becomes relevant. Can I use donated money through a nonprofit organization to start my for-profit business?

Seems simple enough! Not so…

Depending on who you talk to, you will come up with a number of different responses. So let’s look at a few of the common responses.

Answer #1: “Yes, but the business must align with the nonprofit’s vision and purpose.”

A classic example of this model would be an organization that is working to reduce hunger. They could raise money to start a bakery that could help provide jobs in a low-income community. The employees would be able to earn money to be able to buy food for their families and reduce the hunger. The bakery could also provide lower priced goods for the people in the area. Any profits from the for-profit bakery could be used to fund the hunger organization’s initiatives.

In the world of BAM, there are large organizations that have chosen to follow this model. They argue that any business started with the purpose of facilitating their mission (spreading the Gospel) should be able to use donated money.

I spoke with an organization leader who has adopted this model. He said that all of the business profit must then be funneled back into the funds of the mission agency to assist in the overall vision of the mission agency. He was very clear that none of the “missionaries” could receive personal gain from any of the business profits.

In the minds of the mission agencies, the agencies are the true owners of the business and therefore donated money can be used.

“A scenario to consider: “

Who really owns the business?

Let’s assume that John moves to North Africa to start a small restaurant. John needs $75,000 to fund the startup of his business. John’s organization is quickly able to raise the funds from interested churches and so John is ready to begin.

John now goes to the government of his country and begins to register his business. Since John does not want to tie his mission organization to his new business venture, he does 2 things. First, he puts his name on the official paperwork for the company in North Africa. Second, he makes sure that the startup money is first put in another non-mission bank account before wiring it to North Africa.

Questions & Concerns:

According to North Africa, who owns the company?
According to the IRS, who owns the company?
Does the mission agency really own the business or does the person on the paper?
How are profits legally funneled back into the mission agency funds?
Does the individual owner need to declare & pay taxes locally for profits he made?
Does the individual declare his ownership on the required IRS Form 5471?

In the example above, has John crossed some lines in the area of official ownership that might cause the IRS to question whether the mission truly owns the business?

Let’s look at another answer that is commonly given to the question about using donated money to start for-profit.

Answer #2: “Yes, but better to keep for-profit separate from non-profit.”

There are a number of mission organizations that seem to fall in this school of thought. They believe that it is technically “Ok” for donated funds to be used for business ventures; however, they are concerned about their “charity” or “501c3” status.

They draw the line in the sand and say it is much easier to just keep things separate!

So how do they work this model?

These organizations do not allow their missionaries to use any donated money to fund their businesses.

They require all capital funds to be raised from outside “investors” through loans, grants (gifts) or equity stake. One key is that the grants will not be given a tax-deductible receipt.

This seems like a very clean model, but is it?

“A scenario to consider:”

Let’s assume that Fred moves to the Middle East to start a small IT company. Fred needs $55,000 of capital funds to get the business registered and running. Fred decides that he will first approach people for grants and then loans. One of Fred’s wealthy church friends decides to give Fred $20,000 as a grant towards his capital needs. The rest of the money comes in the form of small “low interest” loans.

Questions & Concerns:

Is the $20,000 really considered a gift in the IRS’ eyes?
Did Fred’s wealthy friend need to file the IRS From 706 for a gift of more than $14,000?
Does Fred need to declare this gift on his taxes as other income because it is for business use?
Should Fred use a “loan agreement” or “promissory note” when accepting loans?
Do those giving loans declare any “interest” on their taxes?
What happens if Fred cannot repay his loan?

Although these may be easier answers than scenario #1, you still need to make sure you clearly understand the law before accepting grants and loans.

2. Can employees & members of mission agencies also run for-profit businesses?

In reality, this is a very simple and straightforward question.

As I discussed this question with a trusted CPA, he said that there is nothing in the law that prohibits employees of non-profit organizations to also run or own for-profit businesses.

So why is this question something that mission organizations have struggled with?

When you look at this question in a vacuum, the answer is simple. However, when you mix together the complex worlds of business and missions, the answer seems to get more complex.

There are 2 areas that seem to muddy the waters…

Use of Time

A few years ago this question became relevant in my life. Our business was taking off and starting to generate more income. We had chosen to keep our business money and mission money separate, so we used a separate tax accountant to file our business and personal taxes. We had actually not shared the end of year business profit numbers with the mission’s chief financial officer.

One day the mission got a call from someone who was concerned that one of their “missionaries” was generating extra income on the side. Although we had created a 100% tithe model for our business income (we’ll look at this later), it still made them start asking questions.

After some discussion with their lawyers, they proposed that we begin to keep track of our time according to the business & the ministry.

Is that even possible?

How do you decide if talking to a business associate about his failing marriage is business or ministry?

Since we believe that our businesses thrust us into ministry, we quickly told the mission officials that it was impossible to dichotomize business time and ministry time.

The issue of “use of time” seems to be what causes some people to question whether someone can work for a non-profit and for-profit business.

The reality of life on the mission field is that you are on mission all of the time. I don’t think I ever signed a contract that said my mission related work was 8 hours per day. How would that work? A neighbor comes over after 4:00 PM and I turn them away because I have completed my hours of ministry? That would be ridiculous!

Most missionaries are held accountable by their organizations to focus on and complete the vision of the mission. Some people complete the “mission work” by working as doctors, some as schoolteachers, some as pastors, others as farmers, and now a new breed: working as business owners. As long as the “vehicle” allows you to carry out the mission and ministry, it does not seem that we can question time spent.

The mission agency must make sure their workers are completing their tasks in ministry and mission. As long as they are fulfilling their strategy, then what means they use seems to be irrelevant.

That said, if someone only focuses on the business and never gets into the community, you could question whether they are actually fulfilling their non-profit assignment and therefore bring into question their tax-free status.

What about the income?

A second area that makes this topic a little more complicated is the profits that are generated from the business.

According to the tax specialist, as long as you keep the non-profit income and for-profit income clearly separate, it is not a problem.

Issues begin to arise when you:
1. Fail to declare your business income on your personal taxes
2. Fail to keep the business money separate from your ministry funds
3. Begin to run into issues of “inurement of benefit” (addressed later)

Having 2 sources of income is not an issue with the IRS.

The key is that you need to make sure you follow the proper tax law and declare all of your income.

You may be required to pay extra self-employment tax (social security) or even go over your foreign earned income exemption, but staying legal in the area of taxes is important. Not only could you get in trouble and lose your tax status, but also as Christians we must do all things full of integrity before the Lord.

Whether you are new to the idea of Business as Missions or are a veteran BAMer, you need to make sure that:

Your business clearly aligns with the mission vision and values
You stay true to your missionary assignment
You declare your full income to the government
You work as to the Lord and not man

3. Do I have to declare my Kingdom business income in my home country?

One of the values that most Kingdom entrepreneurs hold tightly is that of integrity. We believe that living lives of integrity and doing business with integrity will allow us to be salt and light to our host cultures.

Integrity sets us apart from many of the other business people in our worlds.

As I have talked to a number of BAMers around the world, I have started to wonder if we have started to flirt with a slippery slope in the area of taxes.

The Great Commission does not authorize us to ignore our home countries’ laws on taxation.

What do I mean?

“A scenario to consider:”

But the mission actually owns the company!

Remember the scenario of John? John moved to North Africa to start a small restaurant with $75,000 raised by his mission organization. On the local company documents, John owns the company; however there is an off the record understanding that John’s mission really owns the business.

At the end of the year, John’s small business has earned a profit of $10,000. Being full of integrity, John is happy for his business to pay the 30% business tax to the local government on the profits for the past year. Using some simple math, the owners of the business have earned $7,000 of profit for the past fiscal year.

Since in John’s mind and the mission’s mind he doesn’t officially own the business, he takes that $7,000 and puts it into a separate “ministry fund” to spend on the mission’s activities.

Questions & Concerns:

Did either John or the mission declare that additional income on their taxes?
Does John fill out the tax form declaring that he is an owner of a foreign business? If so, what amount of income does he declare?
If John’s mission has an “IRS exoneration” for these “mission owned” businesses, do they declare this additional income anywhere?

Just because the profits get donated into a “ministry fund” does not mean that they mysteriously disappear.

“A scenario to consider: “

Remember the scenario of Fred? Fred moved to the Middle East and started a small IT company. Fred decided to take a small salary from the company to meet the local law requirements and also to lessen the scrutiny from his accountant.

Since Fred is “not allowed” to make money (according to the mission), Fred is required to put his salary into the “team pot” for ministry activities. In some cases, Fred may be allowed to keep his money, but it can only be used for ministry expenses.

Being a law-abiding citizen, Fred pays the local government the social security due on this salary. Fred takes the remaining $5,000 and puts it into the ministry fund.

Questions & Concerns:

Did either Fred or the mission declare that additional income on their taxes?
According to all official documentation, Fred earned an additional salary. Does Fred declare this on his foreign earned income form?
If Fred pulls a larger “fake” salary, could it potentially put him over the foreign earned income limit?

From my observations, most Kingdom entrepreneurs are not making enough money to draw the eye of the IRS. Most of them are also not declaring their worldwide income to the IRS.

Is the full of integrity?

Perhaps you are thinking, “But if I give all that I make back to the ministry, then it is like I didn’t make that money.”

My question: Do you think the IRS would see it that way?

I believe that the answer to this question is simple. You absolutely need to declare your business income in your home country. There may be a “double taxation exoneration”, but you still need to declare it.

4. Can a 501c3 lose its nonprofit status by engaging in BAM?

As I have discussed the issue of finances and BAM with a number of organizations, most of them have voiced a concern about jeopardizing their 501c3 status.

Since I am basically ignorant of the laws that guide 501c3 entities, I decided to do a little research into the possible ways that a 501c3 could lose their status. I came across a website www.nonprofitrisk.org and they had a good article called “How to Lose Your 501(c)(3) Tax Exempt Status (Without Really Trying)

The article says that there are really 6 areas that 501c3 organizations need to follow the rules to maintain their tax-exempt states. As I looked over the 6 different areas, it appeared to me that only 2 of them related to the area of Business as Mission.

Way #1: Private benefit/inurement

The above article quotes Richard Crom, Staff Assistant for IRS Exempt Organizations Customer Education and Outreach office as saying:

“A 501(c)(3) organization’s activities should be directed exclusively toward some exempt purpose. Its activities should not serve the private interests, or private benefit, of any individual or organization (other than the 501(c)(3) organization) more than insubstantially. A 501(c)(3) organization is prohibited from allowing its income or assets to benefit insiders (people with a personal or private interest in the activities of the organization)”

So how does that apply in BAM?

From what I understand, if an organization owns and operates a for-profit BAM business, no one in the organization should benefit substantially from the income or assets.

It seems to me that this danger mainly applies two areas in BAM ventures…
1. The organization is the owner of the business – The main concern here is if someone in the organization begins to gain personal income or benefit from the business that the organization owns.

2. Outside investors get free labor from support missionary employees – There could be inurement of benefit to the outside business owner who is earning more profit at the end of the year because they do not have to pay their employees a normal wage. It might best be seen with an example.

“A scenario to consider: “

The investor’s advantage

Imagine the situation where Sam (a supported worker) moves to North Africa to start an English training center. Because Sam does not have the needed capital, he invites his friend Tom (successful businessman in the USA) to become a partner. Sam decides to employee his whole team as English teachers, which give the benefit of both having native speakers and not needing to pay them a salary. At the end of the year, the business is fairly profitable and both Sam and Tom are able to take their share of the profits. Because the business did not have to pay the salaries of the supported team members, the business profits are inflated and Tom could be in danger of “increment of benefit”.

As I said before, I am not a CPA or tax specialist, but it appears to me that this could be an area that Kingdom businesses need to address.

Way #2: Unrelated business income (UBI)

According to the article mentioned above, a second way that 501c3 organizations could lose their tax-exempt status…

“is having too much income generated from activities that are unrelated to the exempt function of the organization. This income comes from a regularly-carried-on trade or business that is not substantially related to the organization’s exempt purpose.”

So how does that apply in BAM?

Most of the time, this seems as if it would not directly apply to BAM ventures because those ventures are directly related to the organizations purpose – to place people in restricted countries and proclaim the gospel.

That said, organizations do need to make sure that each of their BAM businesses are clearly designed to meet the tax-exempt purpose of the organization. If the IRS cannot clearly see the correlation between the business and the purpose, the business income could be perceived as unrelated business income.

If you are concerned about UBI, you can file a 990-T form and pay the necessary tax on that additional income. Please talk to your accountant for more information on UBI.

5. Who owns the profit of my business if & when it is successful?

A few years ago, I was out to dinner with one of the key BAM people from a large mission organization. As we were sitting around the table, the topic of conversation turned to that of business profit. At that time in my life, I was wrestling through questions like:

1. What do I do with the profit earned by my company?
2. Do I actually control the profits or should my organization tell me how to use them?
3. What was the best model for the use of profits?

Blessed with an amazing opportunity to ask this BAM leader my questions, I asked, “If one of your businesses run by your member earns $20,000 in a year, what do you do with the profits?

His response was not what I was expecting! “We haven’t had anyone ever make $20,000 a year, so I am not sure.”

So my quest started to find different Kingdom businesses that were actually profitable and ask them this same question.

Over the past years, I have found a number of profitable BAM businesses and my eyes have been opened to a few different models for use of profits.

It’s the organization’s money…

One of the first models that I came upon was the simple idea that any money (profit) generated by the business was given back to the mission organization. Since the businesses were officially “owned” by the organization (off the books), all profit must be given back to the organization.

Question: Does the organization declare this money as income anywhere on the books or does this money just get “absorbed”?

It all goes back into the business…

Another model that some have decided to use is to continue to plow the profit back into the business. Because they are fully supported Kingdom workers and do not want to have any personal gain from the business money, they reinvest all of the money back into the business.

Question: How does this look to your local accountant who wonders what you live on? What happens when the company is extremely profitable; will you ever have too much money to reinvest?

100% tithe…

A very cool model that I know of that the business owners actually “own & control” the profits of their business, but they have decided to not use it for personal gain. The profits from their companies are full taxed in their home countries, but the owners are committed to using the profit for the Kingdom. They use the money to support others, project, ministry funds and even capitalizing new Kingdom businesses.

Questions: What happens when your kids get ready for college and you have all of this additional income (but you can’t really use)? How does this model impact your personal income taxes?

Note: The organization that I heard who runs this model is looking for creative ways that are full of integrity to answer the above questions. If you want to know more, drop me an email.

No governance…

Some organizations have decided not to govern the “use of profits” for their people. They basically allow them to use the money as they desire. This can be a simple way to deal with the issue of profits but not without questions.

Questions: Is there a temptation to “double dip” from the business and the mission? Is there any accountability?

After years of talking and researching, I have come to a conclusion. There are many different ways to handle profits and each of them has their place.

The key is to make sure that you strategically think about your model and make sure your have considered the “pros & cons” of each method. You also need to think through the legal and ethical ramifications of your model.

Profits are a good thing! We look forward to the day when we have more profitable Kingdom businesses that must struggle through the question of profits.

6. What other financial implications do I need to consider when running a for profit business?

As I have walked this journey of Business as Missions, different questions, concerns & situations keep popping up. Without giving answers to all of them, here are a few questions that you need to consider.

How will this business impact my personal income tax in my home country?
What happens if business profits put me over the foreign earned income limit?
How will my business profits impact my financial aid for college?
What would my donors & supporters think if they knew I was making money from my business?
What measures can I put in place so that I don’t fall down the slippery slope of being driven by money?
Am I being 100% legal and full of integrity in my business dealings?

In conclusion…

The financial questions surrounding BAM can seem huge and daunting, however, I believe that now is the time to address them head on. With the growing surge for reaching the nations using business, we must make sure we clearly think through each of these issues so that we can shine the light of Christ without compromise.

I’d love to hear your comments or other financial questions that you may have. Please add your comments below…

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