If you're singing at a folk club, from the front, as a performance, I think it should be from memory. This may be one of the aspects in which folk is different from other forms eg classical music? Patti Vetta performs in folk clubs but her background is as a recording session singer who sings from music on a music stand, so that's how she performs in folk clubs.

If you're singing from your seat (sitting or standing) in a singaround as part of a shared social experience, and you only feel confident to participate when reading from the words, that's OK.

Even when I write songs specially for special events I try to sing from memory (though will have a crib sheet just in case).

Kitty