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FORTUNE Small Business:

Can a church coffee shop be a nonprofit?

A church group considers the legal and financial logistics of opening a business.

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(FORTUNE Small Business) -- Dear FSB: The senior pastor at our church is considering starting a small business - a coffee shop - which would be located on the church grounds. Since the church already has a non-profit status, we believe that our future business should have it as well. What is the recommended legal structure? What would be the best avenue for financing?

-Verlando Lee Frazier, Jacksonville, N.C.

Dear Verlando: There's nothing wrong with making a profit. The decision about whether to opt for nonprofit or for-profit status for your coffee shop on church property depends on several variables, according to Jean Block, of Social Enterprise Ventures, LLC. The Albuquerque, N.M., organization offers training and consultation to nonprofits looking to diversify from traditional fundraising to earned-income ventures.

The most important factor to consider when you sit down with the church's tax advisor is how much money the church expects to generate from the shop, according to Block.

"Keeping the shop under the church's tax-exempt status is perfectly fine until you reach a certain level of revenue, beyond which point it becomes taxable," she says. "But if you're making so much revenue that you have to pay taxes on it, is that really a problem? That's a good thing!"

Though many consider coffee to be holy water, the IRS might not, which leads to the next issue: is the venture directly related to the nonprofit purposes of the church? "If not," Block says, "you could spin it off as a for-profit."

If the coffee shop is created under the church's jurisdiction, the church's board of directors or elders will be the business's governing body. "But if it's spun off as a for-profit corporation, the governing structure can be a different board of directors made of church members," Block says.

As for financially fueling your caffeine venture, there seem to be as many options as varieties of milk at Starbucks (SBUX, Fortune 500). "There's starting to be a lot more creative financing opportunities for social enterprises," according to Block. "And they're driven by the social entrepreneurs, not the financers."

So get in the driver's seat and come up with a plan. You could approach a lender with a proposed group of church members as stockholders, or you could sell shares of the business to members of the community at large.

Block has also encountered lenders who are willing give a business a loan, and, if the enterprise reaches a certain level of profitability within a defined timeframe, they will excuse the loan and redefine it as an investment. "If you don't reach that level of profitability, you pay back the money as a loan," she says.  To top of page

The coffee conundrum: Can I compete with Starbucks?

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