Los Angeles, CA asked in Business Law and Contracts for California

Q: Can a non profit give to the CEOs side business?

I'm on the board of a animal welfare/rights organization and the CEO has a side business where he only provides foods that our vegan. Can the non profit where he is the CEO/President give to his food service since it involves not eating animals to go towards his food business if all of the board members agree this is okay or is this part of self dealing?

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3 Lawyer Answers
Neil Pedersen
Neil Pedersen
  • Westminster, CA
  • Licensed in California

A: This is really not an employment law issue, yet this question is showing up in the Employment Law section.

Self dealing is not unlawful if the company knows what is going on and approves of the action. As to the optics of the situation for your donors, the key would be that the agreement must be based on fair market values for the goods and services.

Whether the side business is part of the non-profit's purview would have to be determined by someone who is allowed to know much more.

It would be wise for you to locate and consult with a business attorney with solid knowledge about non-profits.

Good luck to you.

James L. Arrasmith
James L. Arrasmith pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Sacramento, CA
  • Licensed in California

A: When it comes to a nonprofit organization giving to its CEO's side business, caution should be exercised to avoid conflicts of interest and self-dealing. Consulting with legal counsel or a nonprofit expert is advised to ensure compliance with ethical and legal guidelines in such situations. They can provide guidance on appropriate ways to support the CEO's side business while adhering to the rules and best practices.

A: There are several issues at play here, and not enough information to give a complete answer. But here are some thoughts.

You ask whether the nonprofit can "give" to the CEO's business. What do you mean by "give?" If the nonprofit is granting money to a for-profit company -- ANY for-profit company -- those actions are not being done for an "exempt purpose" under IRC Section 501(c)(3). If you are a 501(c)(3) and the organization is spending anything more than an "insubstantial" part of its funds on supporting a for-profit company, you are running the risk of losing your 501(c)(3) status.

In addition, under California law your nonprofit is assumed to hold its funds in charitable trust for exempt purposes. The California Attorney General's office would likely be very concerned if the nonprofit was "giving" its funds to any for-profit corporation, but especially if the for-profit company was owned by the nonprofit's CEO. Major red flags here.

Now, let's assume that when you said that the nonprofit was giving to the CEO's food service company you were saying that the nonprofit was buying something from him, not just giving him money. For example, you were holding an event where you wanted to serve food, but in light of your mission you wanted to serve vegan food. So you contracted to buy vegan food from the CEO's company. In that circumstance, we would want to look at whether the nonprofit is a "public charity" or a "private foundation." Public charities are allowed to engage in limited business transactions with insiders (like the CEO) as long as the charity is receiving fair market value for what they spend. (You want to be sure that the charity is following their Conflict of Interest policy here, and you will have to report this financial relationship on next year's Form 990.) On the other hand, a private foundation cannot engage in ANY act of self-dealing. That is, if you are a private foundation (and even if you are paying fair market value for the products that you are buying from the CEO's for-profit vegan food business,) you are in violation of the IRS's rules and your organization and the CEO will likely owe tax penalties and could lose their 501(c)(3) status. In addition, you (as a board member) could face penalties if you voted to approve this kind of self-dealing transaction.

Please contact a nonprofit organizations attorney to discuss the details of your situation.

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