Who's In Charge Here?
No one "owns" a non-profit.
Editor’s Note: This is a review of information available online at https://www.501c3.org. Though I have an inkling why someone would send me this link, the overall information falls into that “good to know” category for all non-profit boards.
How do you deal with related members on your nonprofit’s board of directors?
For IRS purposes, relationships among board members are narrowly defined, typically confined to blood, marriage, or outside business connections. Each of these has limitations also. Blood relations are family members extending to mother, father, brother, sister, son, daughter, and grandmother or grandfather.
Marriage relations can include spouse, son or daughter-in-law, and mother or father-in-law. Concerning business, two or more business partners serving on the board, while collectively owning 35% or more of a for-profit company, are considered related, as are co-workers that have a superior/subordinate relationship at the company they work for.
Even if the people in question believe they are not subject to influence by that relationship, the IRS doesn’t buy it. They consider it to be a conflict of interest that impacts the charity. As such, there are strict rules concerning nonprofit governance where related board members are involved. These rules vary greatly, depending on whether the nonprofit is a public charity or a private foundation.
Because private foundations are not considered publicly supported, there are no limits on board composition, even allowing for an entire board to be members of one family. You often see this with family foundations. But, there are trade-offs. The IRS makes it much more difficult for board members of a foundation to be compensated as employees. It can be done, but the rules are strict and penalties for getting outside those rules are steep.
The concept of who owns a nonprofit organization can be hard for some to grasp, especially given that the answer is, “No one!”
The most popular business entity for nonprofits is the nonprofit corporation, making up well over 90% of all tax-exempt organizations. This type of corporation is very different from the for-profit corporation. A nonprofit corporation has no owners (shareholders) whatsoever.
The concept of who owns a nonprofit organization can be hard for some to grasp, especially given that the answer is, “No one!”
A nonprofit corporation is formed to carry out a non-commercial purpose, whether that be religious, educational, charitable, scientific, or other qualifying purpose. It is prohibited from acting in a manner that results in private inurement (profit) to individuals.
Governance responsibility is vested in the board of directors or trustees. These individuals are accountable to state and federal authorities to ensure the organization operates in a legally compliant manner and for the purposes outlined at formation.
Also, a nonprofit cannot be sold. Again, without an ownership mechanism, it simply isn’t possible. If a charitable nonprofit winds down operations, the board of directors must distribute all of the nonprofit’s assets to another 501(c)(3) after all debts have been settled.
A nonprofit organization is not “owned” by the people who start it, nor their successors in leadership. These individuals operate in a position of trust and accountability for the public at large, who, via the government, allow nonprofits to operate exempt from the taxes that for-profit businesses must pay.