Ensuring Board Independence: Beyond Avoiding Conflicts of Interest
Posted by Robert Torella on October 09, 2024
When considering whether your nonprofit’s board members are independent, you might instinctively say, “of course!” However, board independence extends beyond simply avoiding conflicts of interest. The IRS has a specific four-part definition of independence, and if a majority of your board members don't meet all the criteria, it could raise concerns with the IRS, donors, and other stakeholders about your organization's governance.
The IRS’s Four-Part Definition
For a member of a 501(c)(3) board to be considered independent, the IRS requires that they:
- Are not compensated as officers or employees of the organization or any related entity.
- Don’t receive more than $10,000 in compensation for work as independent contractors for the organization or a related entity (excluding reasonable compensation for board duties).
- Aren’t involved in transactions — nor have close family members involved — that provide material financial benefits to them, which must be reported on Form 990, Schedule L.
Additionally, Form 990 requires disclosure of any family or business relationships between current officers, directors, trustees, or key employees.
Collecting Information
Your nonprofit must make a "reasonable effort" to gather information about board members' family and business ties to ensure accurate disclosures on Form 990. An annual questionnaire distributed to officers, directors, and key employees can help in collecting this information.
It's important to note that board members can still be independent even if they receive financial benefits as part of the population your nonprofit serves. There is also a religious exception for board members who have taken vows of poverty, as long as their religious order receives payments that aren't taxable income.
Some Non-Independent Members Are Allowed
Not every board member needs to be independent. For instance, your board might include an employee or someone who has loaned money to your nonprofit. However, watchdog groups recommend that organizations maintain a majority of independent board members. Some states, like California, even require that at least half of a charitable board's members be independent. The IRS, for its part, expects at least 51% of the board to have no familial relationships with each other.
Maintaining Strong Governance
To maintain transparency and avoid conflicts of interest, aim to have at least two-thirds of your board members be independent. Ensure that all members of your audit and compensation committees are independent, and consider having independent members make up a majority of your governance and nominating committees as well. For more details on how to ensure compliance and strengthen board independence, reach out to us.
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Bob has considerable expertise in auditing and accounting of exempt organizations, specifically educational institutions, arts and entertainment organizations, and other nonprofit organizations, as well as employee benefit plans, auto dealerships, and other commercial entities, where he manages and oversees the all services to these organizations. Additionally, he has significant experience in grant compliance, audits in accordance with Government Auditing Standards and the Uniform Guidance, financial reporting, and taxation of exempt organizations. Bob is a member of the Firm’s Accounting and Auditing Technical Committee and is the chairperson of the Financial Accounting Standards Board Subcommittee. He was named partner in 2024.