Nonprofit Myths: #7 - Family Members on the Board

Starting and running a 501(c)(3) tax exempt nonprofit is a lot of work and not everyone is cut out for it. Some go into the venture with false assumptions and myths and only later find out they didn’t understand what they were getting themselves into. Let’s examine some of those myths.

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Myth: For my new nonprofit, I will put all family members on the board of directors, and we will control the organization.

Truth: This might bring your application for tax exemption under the stern gaze of the IRS, which is on the lookout for conflicts of interest on a nonprofit’s board. Conflict can be many kinds—exclusively family members on the board, board members related to employees, board members who are themselves employees, business relationships involving board members. If more than 49% of your board is made up of related people, there is a chance that IRS will flag your tax-exempt application for follow-up by an IRS agent, and your request for approval as a public charity may be reclassified as a foundation. Is 49% written anywhere? No, but call IRS at 877-829-5500 and ask what percentage of a nonprofit board for a public charity can be family. The answer will be something like, “Although we do not specify in statutes, we want to see less than half the board made up of related members.”

Additional queries will reveal that IRS frowns on public charities that are controlled by related people. Public charities exist for the benefit of the public, not for the benefit of family members. Knowing that IRS has the power to approve or delay your application, don’t give them this reason to hold up your approval. You can always adjust your board composition later and report those changes to IRS in your annual report. An all-family board has other disadvantages: family members might not offer a broad array of outside contacts and relationships; and there is always the potential for “family feuds” – it happens!

Moral of this Myth: To avoid any complications in processing your application, make sure that at least 51% of your board of directors are unrelated.

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"Nonprofit Myths" is a 12-part series by Dr. Kitty Bickford, founder of Pasture Valley Children Missions. As a nonprofit consultant, Dr. Bickford has provided guidance to thousands of nonprofit leaders in best practices for setting-up and effectively running their organizations. We're also proud to claim Dr. Bickford as an alumna of The Grantsmanship Center. 

© Copyright 2020 Kitty Bickford, DBS, CPC     Used  with permission

 

For further delight and edification, here's a short series on board development:

Who's On Your Board?     Where Can You Find Board Members?     What Does a Board Do?

 

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