How can our board members lead and get paid for it?

Hi Carol,
We have questions about how and if we are able to file as a 501(c)3 so that our directors can continue to lead the group while getting compensated for their time and efforts. Do you have any resources for this type of information?

Thank you for your time,

Lisa R

Lisa,

You asked an excellent question about how “our directors can continue to lead the group while getting compensated for their time and efforts.”

It is very difficult and sometimes not possible or desirable to compensate your board members. It creates conflicts of interest, self-dealing and could be forbidden by your state nonprofit laws and even exclude your organization from being granted 501(c)(3) tax exempt status by the IRS.

I’m glad you mentioned that you are in California because California has a law that forbids more than 49% of a nonprofit board to be composed of compensated individuals (or their family members).

This website (from nonprofit lawyers in California) explains the 49% rule:

Under California Section 5227, not more than 49% of a public benefit corporation’s governing body may be composed of “interested directors,” defined as –
(a) Any person who has been compensated by the corporation for services within the last 12 months, and
(b) Any member of such a person’s family.

Source: https://www.adlercolvin.com/what-every-nonprofit-b…
Scroll down to C. Conflicts of Interest and read the entire section.

One more resource in plain English is The California Attorney General’s Guide to Charities. http://npocpas.com/assets/guide_for_charities.pdf….
Go to page 20 and read 3. Duty of Loyalty and Conflict of Interest.


So in a nutshell, your board members need to be independent from conflicts of interest. Being compensated creates a conflict of interest.

I discourage nonprofit boards from being compensated. Most nonporift advocates encourage board members to serve as volunteers.

But you have two options:

Your board needs to be large enough that the individuals being compensated are the minority and are not guilty of self dealing or conflicts of interest. That may be very difficult to do.

Or the other option is to hire help like a bookkeeper or administrative assistant who would not be board members. This may free up the board to serve as volunteers and then have no conflicts of interest.

My book that addresses paying board members is Paying Workers in a Homeschool Organization

I hope that helps,

Carol Topp, CPA

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