Funding a Kingdom Business

by Steven Rundle and Thomas Sudyk

Identifying different approaches mission agencies and churches are using to fund “kingdom businesses.”

In the interest of promoting economic development and/or establishing a Christian presence in less-reached parts of the world, mission agencies—and even some churches—are getting more involved in the funding of so-called “kingdom businesses.” This mirrors a similar trend taking place outside of the formal missions industry, documented in the book Great Commission Companies (2003), but has the added complication of using funds donated to a charitable organization. This practice, while legal, is fraught with potential problems. If done carelessly, the charity could lose its tax exemption, incur unanticipated taxes and penalties and/or face serious criminal charges. It is therefore not surprising to see organizations like the IFMA devoting more attention in recent years to questions related to investment and business ownership. The purpose of this article is to identify the different approaches being used to organize and fund these businesses, along with the strengths and weaknesses of each. It should not be regarded as legal or tax advice; rather, it should be taken as a very basic introduction to the subject.

THE MISSIONARY FUNDED BUSINESS
The most common approach involves the missionary and/or agency owning the business directly.¹ As shown in Figures 1 and 2, the startup funds come either from the missionary’s personal budget or through a separate account that is jointly controlled by the agency and the missionary. Because the missionary is the one principally responsible for raising the funds, the businesses tend to be small and easy to start. Common examples include consulting or computer programming companies and import-export businesses. While there are some noteworthy exceptions, many people who fall into this category see the business as a necessary evil, as something they would rather not do if given a choice. Indeed, many admit quite readily that they place little importance on business success; access to a people group is the main, and sometimes only, concern. Not surprisingly, these businesses often remain small, unprofitable and on the margins of the local business community.

One significant advantage to this approach is its flexibility—the missionary can pursue whatever business idea he or she likes without much concern about economic viability. This is especially appealing in places with poor social and economic track records that remain inhospitable to profit-seeking businesses. Moreover, a business that is subsidized by charitable donations can survive indefinitely, at least theoretically, and provide more freedom for the missionary to pursue activities that fit more comfortably within the agency’s charitable purpose. A third advantage is the direct relationship the missionary has with a mission agency and his or her supporters, which provides a strong source of missional accountability and spiritual support.

The advantages, however, often undermine the business’ success, and indeed almost guarantee failure, even in places where other businesses prosper. For example, agency and church accountability often compels missionaries to give preference to traditional evangelization and discipleship activities, and to downplay the amount of time they spend working on seemingly mundane business problems. After all, the saying goes, “The business is not the reason we’re here.” Donor support accentuates this by reducing the incentive to make the sacrifices—like working overtime or skipping a furlough—necessary to build a genuinely successful business. It is safe to say that when losses are tolerated, they are almost guaranteed.

Another problem has to do with the potential tax and legal implications. Specifically, ownership and control of the company is often unclear and/or separated, leaving the agency vulnerable in the event of an IRS audit. In some extreme cases, for example, the agency will capitalize the business, but for “security” purposes, identify the missionary as the owner. One need not have any formal legal training to see the risks involved in such an arrangement. And even when this is not the case, there is always a risk that some business-related expenditures or distributions will not pass legal muster as appropriate uses of charitable dollars. Yet, agencies often have an unwitting “don’t ask, don’t tell” attitude toward these businesses, treating them as they would any other nonprofit ministry and believing, perhaps, that unprofitable businesses present fewer opportunities for mischief or mistakes.

THE NONPROFIT HOLDING COMPANY
Partly because of the concerns raised above, some agencies are spinning off their business activities into a separate nonprofit organization, as shown in Figure 3. Likewise, some churches, particularly those using business as part of an adopt-a-people-group strategy, are seeing value in setting up a separate nonprofit for the purpose of overseeing the business-related ministries. This approach has several advantages. First, it allows the agency’s management (or the church elders, as the case may be) to remain focused on their primary task of running the agency (or the church), while a separate leadership team oversees the business. Such specialization increases the attention that can be given to the growth and management of the business, and to the legal and tax concerns raised above. Another benefit of specialization is an increased ability to raise capital, which translates into larger, higher profile businesses such as bookstores, internet cafes and language centers that can accommodate in some cases entire missionary teams.

There are, however, some problems with this approach. Old habits and attitudes die hard in the nonprofit world, or so it seems. Very often the same cultural indifference toward profit making and bias toward traditional forms of ministry is evident in the subsidiary organization. For example, the economic rationale for having a team of expatriate missionaries, rather than locals, work for the company is often weak, but is trumped by the ministry ambitions. Here we see another way in which donor support can prove to be distortionary. In addition to the potential disincentive mentioned earlier (one’s living expenses are covered no matter how the business fares), it artificially tilts the calculus in favor of “hiring” missionaries (at no cost to the business) over locals.

Ironically, in spite of the weak economic foundation, profitability is often treated as a guarantee. It is not uncommon for people involved in these projects to speak excitedly about how the profits from the still nonexistent or unprofitable business will soon be used to fund this or that ministry. The careful listener will often notice a lopsidedness to the discussions whereby most of the critical thinking is directed toward the spin-off ministries rather than the business itself. This obvious passion for ministry also makes it difficult to pull the plug on businesses that are failing. To be fair, this is not an exclusively Christian weakness. Social enterprise scholars Gregory Dees and Beth Anderson note a similar trend in the secular nonprofit world, observing that “when one is committed to improving society, it is hard to say ‘enough’” (2003, 12).

THE PRIVATELY OWNED AND FUNDED BUSINESS
A less common, but increasingly attractive, option for agencies and churches is to form alliances with kingdom-minded business owners, helping them identify like-minded investors and employees. The investors, who are often some of the agency’s most faithful donors, invest directly into the business rather than through the agency, and the employees work directly for the company rather than for the agency. As Figure 4 illustrates, this arrangement eliminates any formal linkage between the business and the agency, which leads to fewer problems with the IRS and less tight-rope walking when it comes to questions about one’s missionary status. In addition, the incentives toward business success are strengthened.

Some of the most creative, exciting and effective business-ministry is taking place through alliances like these that are outside of the traditional missions paradigm. It is a strategy, however, that is not without its challenges. First, the investment is not tax deductible, which requires a shift in fundraising strategy from an appeal primarily to the emotions to one that focuses more on the economics. Furthermore, because the agency has no ownership stake in the company, it has less control, and any accountability the company has toward the agency is purely voluntary. Many Christian professionals and their investors are deeply committed to assisting the agency and its mission, but this often provides little comfort to agencies that are accustomed to being in control. Lastly, the relationship between the employees and their home churches can be ambiguous, leading to at least a perception of less spiritual support. (A common concern expressed by people in this situation is that because they are not receiving donor support, “my church doesn’t know where I fit.”)

THE HYBRID
The most complicated and potentially problematic approach involves agencies that have combined some or all of the above approaches by taking a minority ownership stake in a business and/or by allowing their donor-supported missionaries to work for privately owned companies (see Figure 5). Regarding the ownership stake, generally speaking these are not what the IRS would consider to be investment grade assets, so the agency’s reserves are usually off-limits as a source of funds. (This is true for all the approaches, but it seems to be more tempting when considering a minority ownership stake.) Instead, a strong ministry case for the expenditure/investment will need to be made, which, in turn, will require the parties to clearly distinguish between those activities that are charitable in nature from those that fall outside of the legal definition of charity. This separation of “ministry” from “business” is also critically important when donor-supported missionaries are working for the company. If a line is crossed, and donor dollars are used inappropriately, there can be severe consequences.

In spite of the risks, some agencies believe the benefits are greater. The advantages are similar to those of the private ownership approach discussed above, but with the added benefit of the agency having potentially more influence over the company’s management. (How “potential” is the influence depends on many factors, such as the size of the ownership stake, board representation, the service provision contracts and so on.) The formal agency connection also helps reinforce the link between the employees and their home churches, providing a greater sense of “belonging” and spiritual support.

CONCLUSION
The question is often asked “So which approach is best?” The question implies that all situations are the same and that all people are alike. But of course they are not. The donor subsidized approach is more suitable for some situations than others. Some people find the idea of linking pay to performance attractive; others do not. For some, strict accountability to a church or mission agency is nonnegotiable. Others have already built a successful business, and are merely looking for ways to leverage the company’s operations for greater kingdom impact. Some find the idea of maintaining a sharp separation between “business” and “ministry” difficult and distasteful, and prefer the relative freedom that goes with being a privately-owned, for-profit company. In short, there is no single right answer. Instead, when evaluating a potential kingdom business, the following principles should be considered:

1. Economics matters. Many people are willing to let their enthusiasm about the ministry potential cloud their judgment of the economic potential. One way to get an honest assessment of the business is to ask people to invest without the benefit of a tax deduction. You will quickly discover if they think the business has genuine potential. If, after an honest assessment, the business looks too risky, then a donor subsidized business model is probably the best way to go. Just remember that the “profits” are often artificial because they rarely reflect the true cost (labor and capital) of doing business.

2. Incentives matter. It is not always a popular notion in ministry circles, but people respond to incentives. Linking pay to performance will not guarantee a business’ success, but not linking it will make success even less likely. If pay depends on producing a steady stream of stories about evangelism and discipleship, then one’s efforts will naturally be biased toward those activities at the expense, in many cases, of the business.

3. The IRS and the law matter. Do not assume that your good intentions will carry the day in an IRS audit or a criminal investigation. Business laws and tax/regulatory reporting should be followed closely, which includes reporting the “constructive ownership” of any business. In today’s rapidly changing world where robust systems are in place to catch terrorists and tax evaders, it is more important than ever to get qualified legal and tax advice before proceeding with these transactions.

4. Training matters. There is a burgeoning movement of business professionals who recognize business as their ministry. Their challenge is learning how to extend the reach and effectiveness of that ministry. Likewise, traditional missionary organizations are beginning to embrace business, but continue to be challenged in the area of seeing the business as more than a means to an end. In other words, both groups have inherited an overly narrow definition of “ministry” which, if left unaddressed by pastors and university professors, will limit the impact of this approach.

Finding effective ways for missionaries and businesspeople to work together will take time and experimentation. We commend those agencies and churches that are thinking outside of the box and experimenting with kingdom businesses. Unfortunately, our modern tax code has greatly complicated the process, especially for those who are determined to do business within a nonprofit context. Furthermore, the increased scrutiny of law enforcement officials, both here and abroad, following the September 11, 2001 terrorist attacks has narrowed the margin for error. Some agencies continue to treat their “kingdom businesses” as covert operations and are going to ever increasing lengths to conceal the true identity of the company’s owners. These are legal nightmares waiting to happen. Before such a nightmare occurs, it would be prudent for anyone who is combining for-profit and nonprofit approaches to ministry to consult someone who specializes in helping nonprofits navigate these waters safely and legally.

Endnote
1. In this essay we distinguish between missionaries, who derive their income from donors, and “kingdom professionals,” who derive it from the business. This distinction will not please everyone, but it will prove useful for the discussion that follows.

References
Dees, Gregory and Beth Anderson. 2003. “For-Profit Social Ventures.” International Journal of Entrepreneurship Education. 2(1), 1-26.
Rundle, Steve and Tom Steffen. 2003. Great Commission Companies: The Emerging Role of Business in Missions. Downers Grove, Ill.: InterVarsity Press.

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Steven Rundle is associate professor of economics and business as mission at Biola University, and co-author of Great Commission Companies: The Emerging Role of Business in Missions (IVP 2003). Thomas Sudyk is president and CEO of EC Group International and founder of the Global CEO Network.

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