Avoiding conflicts of interest for your not-for-profit organization
Regulators, including the IRS and state attorney generals, believe it is important for exempt organizations to have independent boards, that is, directors who are free from conflicts of interest. Boards that are not independent are viewed as more likely to violate the prohibited private benefit and private inurement rules, which stipulate that exempt organizations must not be organized or operated for the benefit of private interests. Conflicts of interest can be related to either financial or personal relationships and arise when a director has an interest that differs from the interest of the related entity they serve. The conflict of interest may relate to specific transaction(s). If that is the case, only the independent directors should vote on those transactions, and the director(s) who lack independence should abstain from voting.
The number of voting members of the board, as well as the independent voting members, must be reported on Form 990, Part VI, line 1. In Form 990 Schedule O, organizations should describe the use of committees of the board as well as the authority and the composition of the committees. The information on Schedule O is as of the end of the fiscal year and may differ from the information in Part VII related to compensation.
Form 990 instructions to Part VI describe what it means to be an “independent voting member of the governing body.” Board members are considered to be independent only if all of the following apply:
- They did not receive compensation from the organization or a related organization as an employee or officer of the organization;
- They did not receive more than $10,000 of total compensation or payments from the organization or a related organization due to being an independent contractor;
- Neither the board member, nor their family member, were involved in a transaction with the organization or a related organization reported on Form 990, Schedule L, Transactions with Interested Persons.
On the other hand, a member of the board is not considered to lack independence due only to the following:
- They have received reasonable compensation from the organization or a related organization;
- They have donated to the organization – even if the amount is significant;
- They receive financial benefits from the organization as a member.
Best practice for not-for-profit governance
The IRS does not provide sample policies regarding board independence, and whether an organization adopts a written policy is up to that individual organization. That being said, there is a question on the Form 990 regarding whether or not the organization has a conflict of interest policy. Having a policy of this type is best practice. As with any policy, the organization should consider its specific characteristics and circumstances not limited to type, structure, size and culture when developing the policy.
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Identifying and Monitoring Conflicts of Interests in Nonprofit Organizations
