We commonly observe misunderstandings about small nonprofit organizations, even among CPAs, related to the topic of conflict of interest and compensation of board members. Perhaps one reason for confusion is that rules may vary by state. This post focuses on New Jersey law. To the limited extent that I’ve viewed other states’ laws, the basic principles are widely applied.
Conflict of Interest
- Conflict of interest is common and often unavoidable in small nonprofit organizations with limited personnel and budgets; they should not be looked at as an inherently ‘bad’ thing.
- Most states do not require a conflict of interest policy but we believe that it is always a good policy to adapt one.
- The IRS does require nonprofit entities to have a written conflict of interest policy for nonprofit boards that submit the IRS Form 990 annually. That filing requires that the signor(s) acknowledge that they have a written conflict of interest policy. The IRS provides a sample conflict of interest policy.
Compensation of Board Members
- Board members can be compensated for providing goods and services. Excess pay and benefits are subject to IRS regulations; just as this would be in any organization. This post focuses solely on ordinary pay, benefits, and business contracts.
- It is common for a board member to provide board function services as a volunteer and be paid for specific contracted services that are outside of the scope of board director responsibilities. This situation should be covered by the organization’s conflict of interest policy. Moreover, this approach should generally be viewed in a positive light for its practical benefits, not viewed as inherently problematic.
- The board member’s responsibility is to disclose their interest that creates a conflict of interest when bidding to provide a paid service.
- The board’s responsibility is to ensure that the compensation paid is competitive.
- New Jersey law N.J. Stat. Ann. § 15A:6-8 prohibits an organization from cancelling a compensation agreement solely on the basis that a person is a director assuming that other requirements are met.
- Professional services provided at less than market value can be considered to be a donation to the charity.
These are not the only compliance requirements for charities, but in my experience, they may be the most misunderstood. This post was prompted by a CPA who made a comment in a course that he was taught the opposite and I often run into people who have other nonconforming viewpoints based on some other source).
Another useful source of information on this topic is IndependentSector.org