Forming a Nonprofit is an admirable thing to do and leads to much satisfaction in one’s life. Nonprofits help shelter the homeless, clothe the less fortunate, feed the hungry, and so much more. One of the many advantages of forming a Nonprofit is that your organization can potentially become tax-exempt. While often used interchangeably, simply being a Nonprofit, does not give your organization tax exempt status. It is not until your organization is approved by the Internal Revenue Service, as being a valid 501(c)(3), that your organization will be tax exempt. In obtaining 501(c)(3) status, there are many factors your organization should consider. One of the most important of those factors is your Board of Directors. Below are some helpful tips regarding how your nonprofit should structure their Board to comply with the IRS:
1.) How many board members should my nonprofit have?
While the Commonwealth of Virginia only requires your nonprofit to have one board member, the IRS has no requisite number of board members that you must have to reach 501(c)(3) status. However, the IRS has made clear that it desires a nonprofit to have at least three members on its board. We recommend that you start out with a small board of directors, consisting of three to five members, and grow your board as your organization grows. A small board makes for easier communication and interaction. It also increases the potentiality of personal satisfaction of each board member which in turn encourages increased motivation and reinforces participation.[1]
2.) Should I pay my Board members?
No, you should not. There are strong fundamental differences between the board of directors for for-profit and non-profit entities. While for-profit boards are responsible to the shareholders, non-for-profit boards have a duty to further the mission of the charity.[2] As such, the IRS and the National Council for NonProfits strongly recommend not compensating the board of directors for a nonprofit organization other than reimbursement of direct expenses. [3] It should be your nonprofits goal, and thus the goal of your Board to serve the mission for which you incorporated the organization and not to serve the private interest.[4]
3.) Can my family members serve on the Board of Directors?
Your Board can be comprised of family members, but the majority of your Board should not be related. After all, one of the most important goals your Board should have is to remain independent and not be persuaded by outside sources. [5] The most common 501(c)(3) organization is the public charity and the IRS requires that public charities have at least 51% of the voting members of the Board be unrelated. [6]
4.) How should I handle a conflict of interest amongst my board members?
In short, your nonprofit needs to have a written conflict of interest policy that has been prepared and scrutinized by an experienced attorney. This policy should also be adopted by your Board in the beginning stages of the establishment of your organization before any potential conflicts can arise. The National Conference of Nonprofits states that a “policy governing conflicts of interests is perhaps the most important policy a nonprofit board can adopt.”[7] This is because conflicts of interests often come up due to the nature of the organization and conflicts can create an appearance of impropriety and damage the reputation of your organization.
Also, check out our previous video and post entitled “How to Build the Best Board of Directors for your Corporation or Non-Profit Organization” for more tips related to your Non-Profit.
[1] https://boardsource.org/resources/board-size-finding-the-sweet-spot/
[2] https://www.boardeffect.com/blog/how-board-structures-for-profit-not-for-profit-organizations-differ/
[3] https://www.councilofnonprofits.org/tools-resources/can-board-members-be-paid
[4] https://www.councilofnonprofits.org/tools-resources/can-board-members-be-paid
[5] https://non-profit-management-dr-fram.com/2013/11/17/director-independence-a-nonprofit-board-issue/
[6] https://www.501c3.org/kb/related-board-members-of-a-nonprofit/
[7] https://www.councilofnonprofits.org/tools-resources/conflicts-of-interest