Conflict of interest policy for nonprofits

A conflict of interest is not wrongdoing. It is a situation: a person with authority over the organization could gain personally from a decision. The wrongdoing comes when the conflict is hidden, or when the conflicted person drives the decision. A conflict of interest policy is a short written procedure that keeps conflicts in the open and out of the vote.

What counts as a conflict

The Instructions for Form 1023 put it simply: a conflict of interest arises when a person in a position of authority over an organization, such as a director, officer or manager, may benefit personally from a decision they could make.

Common examples in small nonprofits:

• A director's business sells to the organization. A board member owns the print shop that would print the annual appeal.
• A family member is hired. The executive director's nephew applies for the program coordinator job.
• A lease from an insider. The founder owns the building the nonprofit wants to rent.
• Pay for an insider. The board sets the salary of a director who also works as staff.

None of these is automatically forbidden. Many are fine if the price is fair and the decision is made by people without a stake in it. The policy is how you show that.

Why the IRS asks about it

On Form 1023. Part V of Form 1023 asks about compensation and other financial arrangements with your officers, directors, trustees, highest compensated employees and contractors. The instructions explain conflicts of interest and point to the sample policy. They also say plainly that adopting a conflict of interest policy is not required to obtain tax-exempt status. Adopting one, though, puts procedures in place that help your leaders recognize conflicts and reduce the risk that insiders receive an inappropriate benefit. See Form 1023, explained for the rest of the application.

On Form 990. Organizations filing the full Form 990 answer three questions in Part VI, Section B:

Part VI, line 19 also asks whether you made your conflict of interest policy available to the public. The Form 990 states that Section B asks about policies the Internal Revenue Code does not require, but the return is a public document that donors, grantmakers and state regulators can read.

The tax law behind it. Paying an insider more than fair value can be an excess benefit transaction, with excise taxes on the person who benefited and on managers who knowingly approved it. A sound conflict process is also one of the three steps for the rebuttable presumption of reasonableness under Treasury Regulation 53.4958-6. See private benefit and excess benefit and paying founders and staff.

What the IRS sample policy contains

The sample policy is still printed as Appendix A of the Instructions for Form 1023 (Rev. December 2024). The IRS notes that it is an example and does not prescribe specific requirements, so you should use a policy that fits your organization. Items marked "Hospital insert" apply only to hospitals that complete Schedule C.

The sample has eight articles:

1. Purpose. To protect the organization's interest when it considers a transaction that might benefit an officer or director or result in an excess benefit transaction. It supplements state and federal law; it does not replace it.
2. Definitions. An interested person is a director, principal officer or member of a committee with board-delegated powers who has a direct or indirect financial interest. A financial interest includes an ownership or investment interest in, or a compensation arrangement with, an entity the organization deals with or is negotiating with, through business, investment or family. Compensation includes gifts or favors that are not insubstantial. A financial interest is not necessarily a conflict; the board or committee decides.
3. Procedures. The interested person must disclose the financial interest and all material facts. After discussion, the interested person leaves while the remaining members decide whether a conflict exists. If it does, the interested person may present information but leaves for the discussion and vote. The chair may appoint a disinterested person or committee to look at alternatives. The board then decides whether a more advantageous arrangement is reasonably available without a conflict and, if not, whether the transaction is in the organization's best interest and is fair and reasonable, by majority vote of the disinterested directors. A failure to disclose can lead to disciplinary and corrective action.
4. Records of proceedings. Minutes must show who disclosed or was found to have a financial interest, its nature, how the board decided whether a conflict existed, who was present for the discussion and vote, the content of the discussion including alternatives, and the votes.
5. Compensation. A voting director or committee member who receives compensation from the organization may not vote on their own compensation, though they may provide information to the committee.
6. Annual statements. Each director, principal officer and committee member with delegated powers signs a statement each year (see below).
7. Periodic reviews. The organization reviews whether compensation is reasonable, based on competent survey information and arm's length bargaining, and whether partnerships, joint ventures and management arrangements further charitable purposes and avoid inurement, impermissible private benefit or excess benefit.
8. Use of outside experts. Outside advisors may help with the periodic reviews, but the board stays responsible.

Inurement means insiders receiving the organization's net earnings, for example through unreasonable pay. It is prohibited for 501(c)(3) organizations.

Annual disclosure statements

The sample policy asks each director, principal officer and committee member with delegated powers to sign a statement each year affirming that they:

• received a copy of the policy,
• read and understand it,
• agree to comply with it, and
• understand that the organization is charitable and, to keep its federal exemption, must engage primarily in activities that accomplish its exempt purposes.

It helps to add a short questionnaire to the statement: the person lists businesses they own or work for, other boards they sit on, and family members employed by or doing business with the organization. That list is what lets you answer "Yes" on Form 990, Part VI, line 12b. Collect the forms at the first meeting of each year, and have the secretary keep them with the corporate records (see nonprofit recordkeeping).

Handling a conflict, step by step

If the board cannot find enough disinterested directors to vote, that is a sign the board needs more independent members, not a reason to skip the process.

What the minutes should say

Good minutes for a conflict item are short and specific. Include:

• the name of the person with the interest and what the interest is,
• that the person disclosed it, and when,
• that the person left the room, and who remained,
• the alternatives considered (for example, other quotes) and the data relied on,
• the decision on whether a conflict existed, and the vote on the transaction.

When the transaction is pay or property for an insider, the regulation on the rebuttable presumption also asks the minutes to record the terms and date approved, who was present and who voted, the comparability data and how it was obtained, and what the conflicted member did. Those records must be prepared before the later of the next meeting or 60 days after the decision.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.