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Legal Advice

1. Trade offs for a non-profit verses a for-profit organization.

In the case of a church-operated school, a) the business does not pay income tax, b) any retained earnings or losses belong to the church, and c) any accrued value of the business belongs to the church. The director is an employee of the school. In the case of a lease a) the business must pay corporate income taxes, b) any retained earnings or losses belong to the owner, and c) any accrued value of the business belongs to the owner. In many cases, the owner is also the director and receives a salary from the school.

2. Incorporation.

To add a church-run school usually requires that you change the incorporation of the church to include the school. Or, you can incorporate the school separately as a non-profit. See a lawyer. If you are a part of a denomination, changing the incorporation usually requires some level of denominational approval (in the case of the Church of the Nazarene, this is the Properties Board or Advisory Board for your district).

3. In California, licensing is required for a preschool/daycare.

For all practical purposes, it is also required for after-school programs. Licensing a preschool is more difficult than licensing an after-school program because the facility and staffing requirements are more extensive. In our county, the organization that handles licensing is the State of California Department of Social Services, Community Care Licensing Division.

4. Get a Use Permit from your local community.

Both lease and church-operated schools require that the property owner (the church) get a Use Permit from the Planning Commission of the local community. This is definitely true in populated urban areas of California, and probably just about everywhere else in the U.S.

5. Get legal help to write a lease contract.

To lease space to a school requires a contract between the business owner and the church. This usually also requires the approval of a denominational body (in New Life’s case, this is the District Properties Board for Nazarene Churches). It is critical to work with a good lawyer!

6. Leasing to a for-profit organization triggers property taxes for the church.

Any lease of space to a for-profit school impacts the church’s property taxes. In Santa Clara County (San Jose, CA area) the calculation is computed from the percentages of building space, parking lot space, and playground/open space. It does not matter how many hours a week the school uses the space. Whether it's an hour a day or 10 hours a day, if a for-profit school uses space at all you will be assessed property tax as if they used it exclusively. At New Life Church we include a clause in the lease contract so that whatever tax the church is assessed due to the school’s use is paid by the school. Computing this from the annual tax bill is a bit of a project. Our county assessor was very helpful in sorting this out, so contact your tax assessor.

7. Specific liability insurance is required.

In church-run schools you can probably add this to your church’s policy and charge it to the school. If your church is leasing space, expect your insurance carrier to require the tenant to formally verify that they carry the required amount of insurance.

8. Think twice, three times, before providing transportation to/from your school.

Be sure to check with your insurance company, licensing and your state’s laws. Unless you handle this right, one accident can close your business and more!

9. Workers Compensation Insurance is more costly for school workers than for pastors or office staff.

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