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Can a Nonprofit Organization Contract with a Board Member for Services?

Two people shaking handsAttorneys, accountants, and other professionals can contribute valuable expertise to a board. In the best-case scenario, it would be nice if their services would be given voluntarily. However, that is not always feasible.

The underpinnings of the policy that allows tax exemption for public charities is that the dollars raised are used for "exclusively charitable and educational" purposes. The IRS wants to be sure that none of the tax-exempt dollars raised by the nonprofit inure to the benefit of directors. The prohibition against private gain steers us away from hiring "interested persons" to conduct services in exchange for a fee. That said, it is possible to address the apparent conflict of interest you describe by following the Conflict of Interest Policy your board has adopted.

When making the determination whether to "hire" a board member to conduct a service for a fee, the board should be guided by the question: What is in the best interest of the organization?

You can address the conflict by:

  1. Raising it with the board;
  2. Discussing the conflict without the participation of the interested person;
  3. Voting about the conflict without the vote of the "interested person," and recording that process in the minutes.

It is common for the "interested person" to offer the services at, or below, market rate, which helps the board demonstrate the value to the organization. All of this assumes the board has determined the service provider meets a reasonable standard of competence in the field and will provide the assistance the organization needs.

In most instances, there is nothing unlawful about an organization transacting business with an insider. The fact that a conflict exists does not necessarily mean that the organization shouldn’t proceed with a specific action or transaction. Rather, what is important in these circumstances is assuring that such transactions are scrutinized to determine whether the action or transaction is in the best interests of the organization. Generally, a conflicts policy will use a combination of “disclosure” and “independent review and approval” to evaluate potential conflicts. Also note that even if your organization properly follows your conflict of interest policy, contracting with a board member could raise questions in the community. Generally, if you wouldn’t want to read about it in the newspaper, don’t do it.

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From the Standards for Excellence®: An Ethics and Accountability Code for the Nonprofit Sector. The Standards for Excellence code, developed by the Standards for Excellence Institute, includes specific benchmarks and measures that provide a structured approach to building capacity, accountability, and sustainability in your nonprofit organization. The code identifies 6 major areas of nonprofit governance and management: Mission, Strategy, and Evaluation; Leadership: Board, Staff, and Volunteers; Legal Compliance and Ethics; Finance and Operations; Resource Development and Fundraising; and Public Awareness, Engagement

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Advocacy.

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