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Reader Question – Commission for President’s Fundraising

Reader Question – Commission For President’s Fundraising
Question

Lori asks:

I’m head of a board for a 501(c)(3) where the only employee is also the president and founder of the organization. Her salary is currently 20 percent of our budget and she is asking for a large increase upwards of 35 percent, which she wanted brought to a vote. The accountant told her it was legal for her to solicit and designate donations solely for the purpose of her salary. I was under the impression that a not for profit was not designed for the enrichment of a sole person especially when our purpose is to help women released from prison. An independent accountant agreed with me and told me it was illegal. Once I disclosed that, the vote was stopped. Although I am president of the board, I have since learned that two other board members (secretary and treasurer) are okaying that she not only continue with her flat salary but can now get a 50 percent monthly bonus of any donations she brings in (a commission) on a trial basis and are possibly implementing this without a vote, as another vote was not called, but I was informed on how they were proceeding. Is this legal?

Answer

Greg McRay responds:

Questions about whether something is legal or illegal are tough to answer. You may be surprised to hear that soliciting donations for the express purpose of paying a salary is NOT illegal. As long as the purpose of the solicitation is transparent, and the expense legitimate, it can be an effective tactic for smaller orgs to be able to fairly compensate someone without overburdening an already tight operations budget. In order to make it pass the smell test, however, you need to make sure other fundraising efforts aren’t short-changed by any targeted solicitation.

Now, the rest of the story. The 50% bonus you mention is not OK. It’s fine if a portion of funds raised help the nonprofit afford her salary, but not on a commission-type basis. The IRS calls that non-linear compensation and it is almost always a violation of private benefit rules (inurement). In addition, it could be considered a bait-and-switch method of fundraising, and your donors would likely revolt if they knew about such an arrangement.

Another critical point is that your two board members who seem to be green-lighting this activity have no legal right to authorize this without board approval. Your full board needs to address this type of unilateral action swiftly.

Good luck with it!

From time to time, we highlight a reader question that was submitted in response to another article. We try to pick questions that will resonate with a broad audience. In other words, if the asker is wondering about this issue, many others probably are, as well!

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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