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Related Members on a Nonprofit Board of Directors

Last modified: June 10, 2021
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There are few questions we deal with more than this one.  That is, how do you deal with related members on your nonprofit’s board of directors.  Let’s start by defining what is technically meant by “related”.

Definition

For IRS purposes, relationship among board members is narrowly defined, typically confined to blood, marriage, or outside business connection.  Each of these has limitations also.  Blood relations are family members extending to mother, father, brother, sister, son, daughter, and grandmother or grandfather.  Once it gets to aunts, uncles, and/or cousins, you’re probably beyond the strict definition of blood related.  Marriage relations can include spouse, son or daughter-in-law, and mother or father-in-law.  With regard to 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.

Former spouses are NOT considered to be related.

Why It Matters

The IRS considers related board members to not be completely independent.  Even if the people in question believe they are not subject to influence by virtue of 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 with regard to nonprofit governance where related board members are involved.  These rules vary greatly, depending upon whether the nonprofit is a public charity or a private foundation.

Public Charity

Public charities are the most common 501(c)(3) organizations.  These are also the nonprofits that the IRS is most concerned about board composition.  The IRS requires that public charities have at least 51% of the voting members of the board of directors be unrelated.  Beyond a simple majority, it is also important that the organization is able to form a quorum of majority-unrelated directors in order to conduct an official board meeting.  To put that in perspective, if a nonprofit has 7 board members, two of whom are married, the overall balance is OK.  But, if only 4 directors can attend a board meeting, and 2 of the 4 are the related directors, a quorum hasn’t been reached.

A question we often get involves, for example, two married couples being a board, but neither couple is connected to the other by relationship.  Both individuals in each marriage are related (obviously!), but the relationships are considered separately, not collectively.  For example, if a board meeting is held with 7 directors, including both couples, you still have an acceptable balance, because there is no relationship connection between the 4 people.

We are often asked for the specific Internal Revenue Code rule that directly and specifically prohibits majority-related public charity boards.  Often to the frustration of the asker, we cannot.  This principle is one of many IRS regulations that are extrapolated from another rule.  Being classified as a public charity is a preferential status level of 501(c)(3) that brings with it the highest level of donor tax-deductibility allowed.  In exchange, the IRS requires that the board of the organization be free of private benefit (inurement) and governed at arms-length from the personal interest of those doing the governing.  While it may not be chapter-and-verse quotable, the IRS consistently interprets public charity boards with more than half of its members related to one another as being in violation of the inurement prohibition.  This is demonstrated in Revenue Rulings, Revenue Procedures, court cases, and everyday regulatory administration.

Private Foundation

The rules are quite different for foundations, though no less restrictive.  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, compared to a public charity.  It can be done, but the rules are strict and penalties for getting outside those rules are steep.

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  1. I am a founder/director of a 501c3 nonprofit public charity and would like to dissolve. My family would like to start a family foundation, in honor of our parents, to provide scholarships to the school we graduated from and possibly other charities. I am working on by-laws now for the family foundation and trying to understand all the in’s and out’s of a family foundation. Do I have to apply for a 501c3 for the family foundation or can it just be a private charity? And can we do the proposed purpose? My present public charity has 3 board members with 1 related to me. We went from 7 with 1 related to 3 recently. Also, could I donate all the assets from my 501c3 public charity, which relates to the community and school, to my family foundation as long as it is agreed to by the board? Thank you!

    Present Public Charity By-Laws:
    Article IX: Bylaw Amendments
    These Bylaws may be amended as follows:
    Section 1. Proposal
    A Board member or committee proposing an amendment to the Bylaws shall distribute the
    proposed amendment in writing to each member of the Board at least 14 days prior to ratification.
    Section 2. Ratification
    Ratification of a proposed amendment shall require a vote of 2/3 of the Board membership present
    at a Board meeting having attained a quorum. 5
    Article X: Dissolution of Organization
    In the event the Corporation is dissolved, the Board of Directors of the Corporation shall, after
    all liabilities and obligations of the Corporation are paid or provision is made therefore, adopt a plan
    for the distribution of the remaining assets of the Corporation to one or more organizations which are
    organized and operated exclusively for charitable, religious or educational purposes and which are
    exempt from federal income tax under Section 501(c)(3) of the Code. No director or officer of the
    Corporation and no private individual will be entitled to share in the distribution of any assets of the
    Corporation in the event of its dissolution

    Amended By-Laws:
    Article X: Dissolution of Organization
    In the event the Corporation is dissolved, items that have been donated to the organization
    are to be returned to the donor upon request before distribution of any remaining assets. The
    director will have all rights to any-and-all books published on behalf of the Preservation. The
    Board of Directors of the Corporation shall, after all liabilities and obligations of the Corporation
    are paid or provision is made therefore, adopt a plan for the distribution of the remaining assets of
    the Corporation to one or more organizations which are organized and operated exclusively for
    charitable, religious or educational purposes and which are exempt from federal income tax under
    Section 501(c)(3) of the Code.

    1. You have several questions here, so I’ll take them one at a time. Yes, your family foundation needs to have 501(c)(3) status as a private foundation. Your purpose sounds fine, but it’s important to note that private foundations wishing to provide scholarships must seek permission from the IRS for their specific scholarship plan. No, your public charity cannot significantly give to your private foundation. Donations from a public charity to another nonprofit should be limited to public charities. Get with us if you need assistance with setting up the private foundation. It’s tricky when dealing with scholarships, and does not make for a very good DIY project.

      One more thing I’d note: your dissolution clause that dictates giving back to donors upon request is pretty unusual, and not recommended at all unless the donations were considered restricted. Typically, an IRS-compliant dissolution clause would simply require distribution of leftover funds to other charities.

  2. Stumbled across this while researching. Thanks for your insight!
    I recently started managing a Healthcare Safety Foundation. The President Elect is a Corporate Employee of a Device Manufacturer. (Yes, we have a COI in place.) We are seeking to partner with an org who evaluates devices. They say they cannot partner if the President is a Device employee. Started to wonder if this is more commonplace? Even wondering if this might affect donations/grants, etc.? We want to be on the side of ethics. Any resources/advice on the make up of the board (especially President) as a deterrent for collaboration/funding? Or other things to consider? Thanks!

    1. Interesting dilemma. This is something you’re far more likely to encounter with corporate donors, not so much with individual donors. Their reluctance to give makes sense in your case. You’ve done the right thing by having a solid COI policy. Honestly, I haven’t seen this situation all that often. It’s just that with your org’s particular purpose and circles of influence, you may run into this more often that other orgs might.

  3. Can a church pastor serve on the advisory board of a 501(c)(3) nonprofit in Indiana?

  4. Is the sister-in-law considered a related person in the 501(c)(3) organization by IRS?

    What happens when making a decision two board of directors abstain from voting and 6 persons participate in voting and 3 of them are related. Is there conflict of interest in decision making process?

    1. 1. In-laws are not relatives.
      2. It’s not ideal, but there’s no conflict as long as the issue being voted on doesn’t involve the 3 related members directly.

  5. Hi Greg!

    We established a 501c3 nonprofit for my ministry back in 2015 with very little understanding. As I’ve learned more, my original board member set up feels disjointed. We currently have a coaching ministry where I come alongside individuals, a single mom sponsorship program that provides coaching sessions for single moms, as well as a publishing arm. I get invited to speak at churches occasionally as well (obviously not this last year due to Covid). Clearly I am the “face” of this ministry and founder. My current board is myself as President, my husband as treasurer/secretary, and two board members. The two board members do not provide anything of true benefit towards the vision or involvement. They were placed on the board as trusted accountability as well as an understanding that I needed a certain amount of board members to qualify. I do not take a set salary. We do not have consistent Donors, so it was voted on by my board for me to receive compensation as I coach individuals based on their donations into the ministry.

    My question is: I’d like to change my board but I’m not sure my legal perimeters in California.

    What is the minimum amount of members required? Can they have dual roles to keep board small (we are very, very small)? Can it just be my husband and I? Can I bring my mom on board as Chief Financial Officer?

    Thank you so much for your time!
    -Jillian

    1. Hi, Jillian. California allows for single director boards, but the IRS won’t go for that. You’ll need a minimum of 3 people, with a majority unrelated. Right now, your current board setup doesn’t meet IRS expectations. If you and your husband are both board members, you really need 3 other independent members, as well. As to how to change your board, hopefully your organization has bylaws. Your bylaws should spell out how to make additions and subtractions to your board. If you have never adopted bylaws, you really don’t have a legal standard with which to make changes. As to dual roles, yes that’s usually OK. The biggest exception is your officer positions of President and Secretary, which should each be occupied by different people.

  6. 501c3. Five member board. Pres and treasurer take it upon them selves to oust two board members as well as all general members of the corporation and are now paying themselves monthly. They also got rid of founder/CEO. What can we do?

    1. From the description of it, it sounds like their actions were likely not consistent with the organization’s bylaws. Assuming you have legal standing as a current or illegally ousted board member, or as a member or donor, you can always litigate. That option is expensive and messy, as you can well imagine. Another option would be to contact your state’s Attorney General’s office and make a formal complaint. This would likely get you somewhere faster than a lawsuit. In fact, letting these two know your intention of contacting the AG’s office may very well get them to backtrack and course correct.

  7. How do you know if your 501(c)(3) is public or private?

    Also, are board members allowed to be compensated with a 1099 for a specific job for a short period of time when the entire board voted yes to the compensation?

    1. The answer to the first question is answered in your IRS letter of determination. It will tell you if it is considered a private foundation or not.

      As to the second question, It is rarely a good idea to pay anyone working for your organization as an independent contractor (1099) unless they are in business providing a similar service to the public. If it is specific task exclusively for your nonprofit, even if temporary, both your state and the IRS will consider it employment subject to tax withholding and W2. Yes, it’s more of a hassle, but paying under a 1099 can never legally be about convenience. It’s about the legal distinction between an employee and a self-employed individual.

  8. Will a private 501(c)(3) have any issue if a board member, during his position on the Board, marries a teacher of the 501(c)(3)? I get all sorts of answers on this and would like something concrete.

    1. I think you’re asking what happens when a board member marries an employee. It certainly creates a potential conflict of interest, but not necessarily one that is illegal. The issue is compounded somewhat if the nonprofit is indeed a private foundation. If it’s a public charity, just make sure the board member abstains from decisions that affect their spouse. Otherwise, it’s probably fine.

      If it’s a private foundation, it’s a little trickier. Persons related to private foundation board members are considered “disqualified persons”. That’s not a bad thing, it just means they are insiders for whom self-dealing becomes a very big deal. Employment within a private foundation by a disqualified person is only allowed when the job is considered “ordinary”, “necessary”, and is for “personal services”. The first two is likely not an issue. The third one might be, but probably not. Personal services are better understood as professional services. Because being a teacher requires a specific set of qualifications for a very specific task, it probably qualifies as personal services under a broad interpretation. Unfortunately, this is an area where the IRS is a little vague and subjective.

      Having said all that, I’m guessing your nonprofit is likely NOT a private foundation. By teacher, I’m assuming your organization is a school. That’s a defined category of public charity, so it’s hard to see how it could be private.

  9. What about a 501c3 private school where the family relationships are between board members and staff? If 3 of the 7 board members are married to teachers at the school, that could have the potential for voting to achieve personal benefit, right?

    1. It could, certainly. But in the example you posted, there is a majority of board members who have no such conflict. Therefore, it should be considered a compliant board, as far as related members go.

  10. My family has a private foundation that has been around for almost 30 years. Due to off and on friction I have only been included in about five annual meetings. Thus, I have only been able to donate a small amount of money – comparatively speaking – to the amount of money that my family members have donated.

    After much thinking I feel like this is unfair to the places that I think have a good mission and that I’d like to donate to. Is there any legal action that I can take regarding all the money that I have not been allowed to donate and the meetings that I have not been invited to?

    Do I have any legal standing – since I was never taken off the board or never resigned. Thank you

    1. The answers probably lie in your foundation’s bylaws. Most nonprofit bylaws will spell our required meeting notices for all directors, term limits for officers and directors (less common with private foundations), and requirements for removing someone from the board. My guess is that your most likely legal standing will be your lack of receiving notice of meetings. You may need to have an attorney familiar with foundations take a look at your specific situation to see what, if any, remedy may be available to you.

  11. I am considering starting a 501C3 in Louisiana. Louisiana Law allows for a single person to form a 501C3. If I am the sole person “President and CEO” of my 501C3, how can I legally receive “reasonable compensation” and not have problems with the IRS?

    1. Louisiana isn’t your issue, the IRS is. The IRS will require you to have a board made up of at least 3 individuals, with a majority unrelated. What you may want to consider is a sole member nonprofit, where you are the only member, and you appoint the independent board. It’s tricky to do correctly, and we recommend you don’t try it at home. If such a structure is necessary for you, we can help you with our SureStart service.

  12. For a religious 501c3, would it be permissible to have 3 board members? Myself as the director, a father – in- law and a person totally unrelated, and a brother-in-law or would these be considered related by marriage?

    1. In-laws are not considered related for board purposes under 501c3. Having said that, your structure may not represent the level of independence that would lead to a more effective board. You’ll have to decide that part.

  13. Do the rules about board conflict of interest relationships apply to statutory 501c3s such as private schools?

    1. I’m not sure what you mean by statutory. Public schools can be considered statutory 501c3s, but not private ones. Private schools must obtain definitive determination as a 501c3 from the IRS to be tax-exempt. And yes, the COI rules apply.

  14. Wondering if the 501(c)3 can sell an owned asset (car) to a member of the board member’s family without issue. Kind of off topic but want to do it right.

    Thanks

  15. Hi there, I’m starting a 501c3 with only one board member (me) in the beginning, but I plan to add more board members later. My daughter-in-law is the secretary. Is this permissible? Some have said the IRS dislikes 501c3’s with board members comprised of more relatives than nonrelatives. My daughter-in-law is not actually a board member, only a secretary. Can you shed some light on this? Thank you!

    1. The article itself sheds a lot of light, but here you go. You cannot be a board of one on a 501c3, even if it is a private foundation. And especially with a public charity, you must have a majority independent (unrelated). There’s no problem necessarily with having your DIL serve as an officer, but you most likely will need to recruit additional board members.

    1. This is the mega-question we get all the time. There isn’t any code or statute that directly says anything about relationships between board members. In the tax compliance world, the issues involving relationships are a matter of extrapolating the IRS restriction on inurement/private benefit, IRS internal guidelines, and case law. It can be frustrating, especially to people new to nonprofits, that the IRS would so strictly enforce this principle when it isn’t specifically addressed in legislation or regulation. That said, I can tell you from nearly 30 years of experience, the IRS strictly prohibits majority relations on public charity boards, despite the lack of regulation. Their perspective is that it impossible for a charity to be governed at arms-length and without conflict of interest if the governing body isn’t a majority independent, hence the prohibition.

  16. How would I start a Private Foundation in the state of Louisiana? Does this require obtaining a 501(c)(3) status? Can I start a nonprofit without assigning board members if I’m not getting paid, but for charitable purposes only?

    1. A private foundation is, by definition, a 501(c)(3). Most of the time, it requires the creation of a nonprofit corporation, followed by applying to the IRS for tax-exemption. You must have a governing board, but in the case of a private foundation, you may be able to get by with a minimum of two individuals. Get with us if you want to set one up. It’s one of the things we specialize in.

  17. An Oklahoma non-profit with 10 members, (4 officers the rest directors). The pres. is married to a director, VP is married to a director, Super is married to a director, the secretary/treasurer is married to a director, and the last two directors are related auto and nephew. None of the officers are related. Is this legal.
    Thank you in advance.

    1. I assume you are talking about a public charity, not a private foundation. It wouldn’t matter with a private foundation. In a public charity, the issue is that a majority of the governing board should be unrelated by blood, marriage, or outside business ownership. This nonprofit has a number of pairings, but a majority are unrelated to each other. That’s what matters. So yes, it sounds legal to me.

  18. Our board is a 501c3 public benefit Corp.
    We have 5 board members; two of the members are related. The relationship is mother/son.
    It that ok to do?

  19. Hello,

    I am a member of a 501c3 the nonprofit is a public incorporation in the state of Maryland. The President and Treasurer are husband and wife. They are responsible for the money of this incorporation and in particular the payments. How can I find out what the statutes are for Maryland in regards to conflict of interest or IRS codes against this?

    1. The Maryland Nonprofit Corporation Act should give you the info you are looking for. Also, the AG’s office should be able to shed light on state law regarding conflict of interest. Most of the time, related members are not a legal problem unless they are the majority of the board. In this case, it isn’t best practice at all for all money handling to be done by a married couple, but it’s probably not illegal. There needs to be full transparency to all money handling, however. Best practice would be to remove one of the married partners from financial control.

  20. Can a wife be Vice President & husband be treasurer of a board in RI? 13 people on board, includes pres, vp, secretary & treasurer.

  21. If I have 3 family members on the board if I add 3 non family members will it be legal to get approved for the 501 c3? Thank you

  22. What if a 501(c)(3) religious non-profit has 7 board members in which A and B are married and C is their son; D and E are married and F is their daughter married to G. However, A,B, and C are not related to D,E,F and G. Is this considered a conflict of interest by the IRS?

    1. You ever work for the IRS? They’re really good with the A,B,C scenarios!

      The problem is with D,E,F, and G. Those four are considered related, and occupy more than 50% of the board voting power. With the setup you described, it’s definitely not a compliant structure, and requires adding more individual members. It may also require one or more of the D-G gang to step off the board.

  23. Can a spouse be the treasurer? I have only people who are out of state on my board besides my husband and me. We are not a 501c3 yet but will be filing. (The Articles of Inc have been registered with the state. If I add another board member who could be the treasurer instead, do I have to amend my articles? I am already going to send in an amendment to change the name, so I assume I could do them both at the same time. (And I found out from this article I do have to add another board member because I have 4 board members right now and 2 are my husband and me. Why didn’t my lawyer who filed my A of I tell me this?) Thank you!

    1. There are usually no limits on related board members holding officer titles. The limits usually involve the total number of overall board seats occupied by related individuals. As to why your lawyer didn’t explain any of this, my guess is he/she rarely deals with nonprofits and simply didn’t know. We run into that situation a lot, unfortunately.

  24. I have a question. If there are 3 board members of nonprofit, 2 are mother and daughter, with the daughter’s name changed by marriage and the third is unrelated by blood but all three are board members and co-owners of a for profit business, all are voting members of both companies, does the organization fall within the IRS’s guidelines?

    1. Not even close, Steve, assuming it’s a public charity 501(c)(3). The mother and daughter are still directly related, regardless of the daughter’s marriage status. At least a simple majority of of public charity board must be unrelated by blood, marriage…and here’s your other question…common ownership of a commercial business. Co-owners who collectively control 35% or more of a business are considered related for purposes of public charity governance. Based on what you said, all three are related.

  25. What if there are three members on the board: myself, my husband, and an unrelated individual, but my husband is a non-voting member. Would the organization still be compliant?

    1. I guess it depends on the definition of “compliant”. In the strictest sense, you would have a voting board made up of 2 unrelated members. Therefore, it is compliant from the standpoint of not having related members controlling a majority of votes. That said, the IRS is known for having an expectation of at least 3 voting members being on a board. It’s not a chapter-and-verse regulation, but is generally where the IRS plants their flag when reviewing public charity applications. If the organization is already IRS approved as a 501(c)(3), most likely you will not encounter any issues with this. The most important thing is making sure you have sufficient input from 3 people to successfully carry out your mission.

  26. Wiith a public charity, if the majority of the board is related, but not compensated in any way, does this still hold true? How does one remove these family members if they have the majority vote and refuse to step down? Can it be done by introducing a motion to prohibit related board members and using a conflict of interest stance to force them off? Why would the IRS approve a nonprofit as a public charity when the majority of the board was related to begin with?

    1. There’s several questions here, so let’s look at each one. First, yes, it still holds true that a majority of your public charity board needs to be unrelated, even if all of them are uncompensated. To regain an appropriate balance of members, there are a couple of ways that can be done. Voluntary resignation of one or more related members is one way. Another way would be to add additional members in order to dilute the control of the related members. Your suggestion of introducing a motion due to conflict-of-interest sounds reasonable. As to why the IRS would approve it? Simple…the IRS wasn’t informed at the time of the application for 501(c)(3) status. If it was disclosed, the IRS would have required dilution prior to approval.

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