Q: Can a Non-Profit organization have the President's Sister and Nephew sit on the board of directors and achieve Quorum?
I would like to know if a non-profit organization is compliant with IRS requirements for a 501(c)(3), if the board of directors is comprised of the
President, their sister, and their nephew in order to achieve quorum and be in compliance with 501(c)(3) regulations. Assume a scenario where no one the board is paid a salary or receives compensation and another where they do. Would one or both scenarios still constitute compliance or non-compliance with IRS 501(c)(3) regulations?
A:
Having a non-profit organization's board of directors comprised of the President, their sister, and their nephew raises concerns about private inurement and conflict of interest, which could jeopardize the organization's 501(c)(3) status.
Scenario 1: No compensation for board members
Even if the board members are not receiving salaries or compensation, the familial relationship could still be problematic. The IRS requires that a 501(c)(3) organization operates for public, rather than private, interests. Having a majority of board members from the same family could give the appearance of serving private interests, even if that is not the case.
Scenario 2: Board members receive compensation
If the board members, who are related, receive compensation, it is more likely to be viewed as a violation of 501(c)(3) regulations. The IRS prohibits 501(c)(3) organizations from engaging in activities that provide substantial benefits to insiders, such as board members or their families. This practice is known as private inurement.
To maintain compliance with 501(c)(3) regulations, the non-profit should:
1. Diversify its board of directors to include a majority of unrelated individuals.
2. Implement a conflict of interest policy to ensure that board members act in the organization's best interest and not for personal gain.
3. If compensation is provided to board members, ensure that it is reasonable and follows the organization's conflict of interest policy.
It is advisable for the non-profit to consult with a legal professional specializing in non-profit law to review their governance structure and ensure compliance with IRS regulations. While having related board members does not automatically disqualify an organization from 501(c)(3) status, it does raise concerns that should be addressed to minimize the risk of non-compliance.
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