Our nonprofit organization has an attorney on its board who is affiliated with a sizable law firm in town. Is it appropriate for that person's law firm to do legal work for us and be paid?
Yes. Although a few nonprofits have a conflict of interest policy that prohibits business relationships with any board member or organization with which a board member (or certain close family members) is affiliated, there is nothing illegal or inherently wrong with having related organizations perform services for the organization. In many cases you will get the best possible deal from someone who knows the organization well. We don’t recommend an absolutist conflicts policy.
You should be sure that you have a conflicts policy that requires disclosure (which is already clear in this situation) and nonparticipation in the hiring decision by the director who has the conflict. (See Ready Reference Page: “Conflict of Interest Policies Help Avoid Problems") Even if the director does not have a sufficiently large ownership interest in the firm so that the firm is technically a “disqualified person” for excess benefit tax purposes (and even if you are not a 501(c)(3) or (c)(4) organization subject to excess benefit tax rules), you should treat the transaction as subject to the excess benefit tax rules and assure that the firm is competent and being compensated reasonably. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions”) You may have to report the relationship on your Form 990 tax information return, but it would not be at all unusual.
Tuesday, June 17, 2014