Church-hosted schools and co-ops: the model, what to put in writing, what to ask

Not legal, tax or insurance advice. The church's attorney, its insurer and your CPA should each review the arrangement before anyone signs.

Why it's common

Church buildings often sit empty on weekdays, and they come with classrooms, bathrooms, parking and a kitchen. The National Microschooling Center reports that roughly a quarter of microschools meet in houses of worship. That figure covers where they meet, not whether the church runs them.

Two very different models

1. The school is a ministry of the church.

The church operates the school under its own legal entity and tax status.
IRS Pub 1828 says churches are "automatically considered tax exempt and are not required to apply."
Pub 557 lists "a school below college level affiliated with a church" among organizations not required to file an annual return.
The school still must adopt and publicize a racially nondiscriminatory policy and certify it each year (Form 5578 if no Form 990 is filed).
The church's board ultimately controls the school.

2. The school is a tenant.

An independent LLC or nonprofit rents or borrows space under a written agreement.
The school keeps its own control, books and insurance.

What changes between the two:

Who can lend to you. The Lending Lab requires the borrower to be the legal entity that runs the school. Christian lenders such as America's Christian Credit Union and AdelFi lend to "churches, Christian schools, and ministries."
Which grants you can reach. Church-and-nonprofit funders like the Methodist Foundation for Arkansas won't fund an LLC.
Whose name is on the EFA application.

What to put in writing (facility-use agreement)

Brotherhood Mutual, a church insurer, publishes a checklist for churches lending their space. Its points, in plain English:

A signed facility-use agreement.
Hold-harmless, indemnity and defense clauses, reviewed by the church's attorney for Arkansas law.
Your own liability insurance, with limits that "equal or exceed your church policy's limits (Ex.: $5,000 medical payments and $1 million liability)."
The church named as an "additional insured," with proof of insurance on file.
Which rooms you use and when. Cover wear and tear, and any high-risk activities.
"Adequate adult supervision" for groups working with children.
Emergency information, and the fix for any known building defects.

Church Mutual also offers a free "Building and Facility Use Agreement" form.

Add school-specific items:

Rent or donation. The amount, and when it's due.
Term and renewal. Notice periods, and what happens if the church needs the space back mid-year. Mid-year is your biggest risk.
Storage, signage and setup/teardown rules.
Background-check policy for anyone around children. EFA schools and providers must fingerprint staff anyway.
Who is responsible for fire and occupancy compliance. EFA participating schools must "hold valid occupancy of buildings."
Faith expectations. A clear statement of any expectations either way, so nobody is surprised.

Questions for the church's attorney and CPA

Property tax. Does hosting a for-profit tenant (or charging rent) affect the church's property-tax exemption or create taxable rental income?
Coverage. Does the church's insurance require anything specific from us, such as limits, additional-insured wording or abuse coverage?
Ministry or tenant? If we're a ministry, who signs contracts, holds the bank account and employs the teachers?
The building. Are there zoning or occupancy issues with weekday school use?

Questions for your own CPA

Should our school be a church ministry, its own nonprofit, or an LLC?
If we're a ministry, how do we keep school money traceable inside the church's books?

Money that can come with the partnership

Low or free rent. Often the biggest single saving.
Loans: Christian credit unions (ACCU, AdelFi), Thrivent Church Financing (to the church), and LCEF for LCMS schools.
Free training: Herzog Foundation's SchoolBox, "an 8-step guide to starting a school," free to access.
Small volunteer grants: a Thrivent member can run an Action Team project (up to $250) for a nonprofit or church school, not an LLC.

Two very different models

1. The school is a ministry of the church.

The church operates the school under its own legal entity and tax status.

IRS Pub 1828 says churches are "automatically considered tax exempt and are not required to apply."

Pub 557 lists "a school below college level affiliated with a church" among organizations not required to file an annual return.

The school still must adopt and publicize a racially nondiscriminatory policy and certify it each year (Form 5578 if no Form 990 is filed).

The church's board ultimately controls the school.

2. The school is a tenant.

An independent LLC or nonprofit rents or borrows space under a written agreement.

The school keeps its own control, books and insurance.

What changes between the two:

Who can lend to you. The Lending Lab requires the borrower to be the legal entity that runs the school. Christian lenders such as America's Christian Credit Union and AdelFi lend to "churches, Christian schools, and ministries."

Which grants you can reach. Church-and-nonprofit funders like the Methodist Foundation for Arkansas won't fund an LLC.

Whose name is on the EFA application.

What to put in writing (facility-use agreement)

Brotherhood Mutual, a church insurer, publishes a checklist for churches lending their space. Its points, in plain English:

A signed facility-use agreement.

Hold-harmless, indemnity and defense clauses, reviewed by the church's attorney for Arkansas law.

Your own liability insurance, with limits that "equal or exceed your church policy's limits (Ex.: $5,000 medical payments and $1 million liability)."

The church named as an "additional insured," with proof of insurance on file.

Which rooms you use and when. Cover wear and tear, and any high-risk activities.

"Adequate adult supervision" for groups working with children.

Emergency information, and the fix for any known building defects.

Church Mutual also offers a free "Building and Facility Use Agreement" form.

Add school-specific items:

Rent or donation. The amount, and when it's due.

Term and renewal. Notice periods, and what happens if the church needs the space back mid-year. Mid-year is your biggest risk.

Storage, signage and setup/teardown rules.

Background-check policy for anyone around children. EFA schools and providers must fingerprint staff anyway.

Who is responsible for fire and occupancy compliance. EFA participating schools must "hold valid occupancy of buildings."

Faith expectations. A clear statement of any expectations either way, so nobody is surprised.

Questions for the church's attorney and CPA

Property tax. Does hosting a for-profit tenant (or charging rent) affect the church's property-tax exemption or create taxable rental income?

Coverage. Does the church's insurance require anything specific from us, such as limits, additional-insured wording or abuse coverage?

Ministry or tenant? If we're a ministry, who signs contracts, holds the bank account and employs the teachers?

The building. Are there zoning or occupancy issues with weekday school use?

Money that can come with the partnership

Low or free rent. Often the biggest single saving.

Loans: Christian credit unions (ACCU, AdelFi), Thrivent Church Financing (to the church), and LCEF for LCMS schools.

Free training: Herzog Foundation's SchoolBox, "an 8-step guide to starting a school," free to access.

Small volunteer grants: a Thrivent member can run an Action Team project (up to $250) for a nonprofit or church school, not an LLC.