Our 501(c)(3) religious nonprofit would like to know if it is a conflict of interest for someone who is receiving a benefit from the organization (i.e. a rent free house, for example, or a below-market rate lease) to be a member of the corporation and/or serve on the board of directors?
This is the first question in our Week of Great Nonprofit Questions - December 18-22
There is always a conflict when a member or director of an organization directly receives services or benefits from the organization, but that does not mean that the conflict is illegal or otherwise improper. It can be very helpful for an organization to have within its governance structure some of the users of its services.
Several federally funded programs have required a certain proportion of clients, occasionally even a majority, to serve on the board. Even in calculating excess benefit transactions, where a director is by definition a “disqualified person” who would be getting more from the organization that is being provided in return, the Treasury Regulations make clear that a program benefit will not be treated as a taxable excess benefit if provided solely because the director is a member of a charitable class for which the organization provides benefits and the benefit is part of the organization’s effort to accomplish its mission. A hospital can provide charity care to a director to the same extent that it can provide charity care to any other patient with similar income limits. (The rules are not the same for a private foundation and even a charitable benefit is likely to be considered improper self-dealing.)
Obviously, the member or director should not be representing the organization in negotiating the scope or quality of service the member or director personally receives from the organization, and the organization could get into trouble for private benefit if its services are being provided primarily to directors or a small group of members. But there is no reason that clients should be totally excluded from your membership or board. They can provide a much needed reality check when trying to measure the effectiveness of your services.