You are here:

Nonprofit Law/Director Qualifications

Advertisement


Question
QUESTION: I am helping out a 501c3 and have determined they have:
4 board members plus 3 Directors: one is the organization's ED who is also a trustee, one is an outside party (Treasurer) and the last is a contractor of the organization (Secretary).

Something about this doesn't look right to me! First, isn't there just ONE board of trustees and then some members hold officer positions? If this is an acceptable framework, is there a problem if the Secretary is also a contractor?

Thanks for any help here...

ANSWER: I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. Your issues are controlled by state law and states may differ somewhat with how they would treat such issues. Even though this forum is not for such state law issues, if you inform me whether the 501(c)(3) organization is incorporated and, if so, under what California law "Nonprofit Public Benefit, Nonprofit Religious or Nonprofit Mutual Benefit Corporation", I will direct you some.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    


---------- FOLLOW-UP ----------

QUESTION: Thank you, Harvey.
The 501c3 is a Nonprofit Public Benefit organization.
Any direction much appreciated.
Amy

Answer
http://goo.gl/Zm9Z6  starting at section 5002 is the California
Nonprofit Corporation's law and specifically starting at 5110 is
the law for Nonprofit Public Benefit Corporations.

Specifically note 5210
--- Start of Excerpt ---
 Each corporation shall have a board of directors. Subject to
the provisions of this part and any limitations in the articles or
bylaws relating to action required to be approved by the members
(Section 5034), or by a majority of all members (Section 5033), the
activities and affairs of a corporation shall be conducted and all
corporate powers shall be exercised by or under the direction of the
board. The board may delegate the management of the activities of the
corporation to any person or persons, management company, or
committee however composed, provided that the activities and affairs
of the corporation shall be managed and all corporate powers shall be
exercised under the ultimate direction of the board.
---End of Excerpt---
So when you refer to "board members" you are referring only to such persons (who are members of the Board of Directors). Now, evidently, the corporation calls some other persons "Directors" even though they are not on the Board so that is allowed, but just tends to cause confusion.   The corporation may have other offices with different titles as specified in their bylaws: as you can see in 5213
--- Start of Excerpt ---
 (a) A corporation shall have a chair of the board, who may be
given the title chair of the board, chairperson of the board,
chairman of the board, or chairwoman of the board, or a president or
both, a secretary, a treasurer or a chief financial officer or both,
and any other officers with any titles and duties as shall be stated
in the bylaws or determined by the board and as may be necessary to
enable it to sign instruments. The president, or if there is no
president the chair of the board, is the general manager and chief
executive officer of the corporation, unless otherwise provided in
the articles or bylaws. Unless otherwise specified in the articles or
the bylaws, if there is no chief financial officer, the treasurer is
the chief financial officer of the corporation. Any number of
offices may be held by the same person unless the articles or bylaws
provide otherwise, except that no person serving as the secretary,
the treasurer, or the chief financial officer may serve concurrently
as the president or chair of the board. Any compensation of the
president or chief executive officer and the chief financial officer
or treasurer shall be determined in accordance with subdivision (g)
of Section 12586 of the Government Code, if applicable.
---End of Excerpt---

The Secretary may also be contracting with the corporation, but then the conflict of interest issues arise if that Secretary is also a member of the Board of Directors.   A conflict of interest is present whenever a director, or a close relative of that person has a
material personal interest in a proposed contract or transaction
to which the 501(c)(3) organization may be a party. Some conflicts
do not result in any illegality. We would need to look at the
decisions of the organization or the Directors to decide if their
actions are illegal. This forum is only for federal tax questions
regarding 501(c)(3) public charities as I have explained in my
profile.

The IRS has published at
www.irs.gov/irm/part7/irm_07-025-003-cont02.html#d0e4718
---Start of Excerpt--
Where an exempt organization engages in a transaction with an
insider and there is a purpose to benefit the insider rather than
the organization, inurement occurs even though the transaction
ultimately proves profitable for the exempt organization. The test
is not ultimate profit or loss but whether, at every stage of the
transaction, those controlling the organization guarded its
interests and dealt with related parties at arm's-length.
---End of Excerpt--

--- Start of Excerpt ---
an organization may represent that services will be provided at a
significant discount to the organization. When an organization
contracts with interested board members, the circumstances may
demonstrate that the organization does not have a purpose to
benefit the insiders. Sales or services by the board members'
businesses to an organization at a significant discount, at or
below cost, would help to justify the selection based on the
economic benefit to the organization....Transactions at fair market
value with board members may be allowed. But the determination to
do business with a board member or other interested party with
control must be made by an independent disinterested board. It is
not unusual for a board member to offer his own business services
to the organization. However, if the board member is not selected
by a disinterested board, then a transaction that would provide
services even at low market rates is problematic.
---End of Excerpt---
www.irs.gov/pub/irs-tege/eotopicb96.pdf on pages 22-23

Generally, under state law, the interested director should
disclose to the Board the particular conflicts annually and before
any vote and then should not vote in the matter, but
Section 5233 deals with the issue when a director has a self-dealing transaction, not with officers.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

Nonprofit Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


Harvey Mechanic

Expertise

I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


©2016 About.com. All rights reserved.