When starting a new nonprofit it is common for the founder to want to ensure the mission of the organization as they envision is being carried out. Having a Board of Directors can be scary and sometimes I hear that founders want to make sure the board is “on board” with their vision for the organization. In doing so, founders will sometimes choose friends or family members who can help to carry out their vision and the mission of the nonprofit.
While this strategy may work short term, there are many reasons this is not a sustainable one for the nonprofit.
- IRS Strongly Opposes the practice
While it is non “illegal” to have family members on the board, the IRS strongly discourages the practice. In my practice, I have had numerous times where the IRS told a new nonprofit they had to remove family members from the board. In some cases, family members were also being paid to do activities of the organization and serve on the board. This is not allowed as it violates board inurement rules of a nonprofit organization.
- Voting Blocks
Family board members can create a voting block or may not feel comfortable presenting alternative ideas and solutions. Nonprofits have to ensure the board is independent of the staff, including the founder, when making decisions.
- Conflicts of Interest
Usually the founder does the day to day activity of the nonprofit. This person is known as the Executive Director. Whether paid or unpaid, the ED is a part of the organization. The Executive Director serves at the pleasure of the board, but not on the board. Furthermore, if family members are on the board and making decisions on the pay or duties of the ED, there is a conflict of interest if that person is related to them. The family member may want to limit or expand the EDs duties or pay and this may not be in the best interest of the nonprofit.
- Nonprofit Standard Practice
It is Nonprofit Standard Practice to not have family members on the board whether they are related to each other or the Executive Director/Founder. Boards have run into problems with board inurement, conflicts of interest and liability issues when made up of family members.
- Foundations usually won’t give grants to family boards
Most foundations follow Nonprofit Industry Standards and Guidelines when considering what organizations to give money to. Obtaining grants is highly competitive and often times foundations scrutinize the composition of a board when determining which organization will receive their grants. Although foundations won’t always convey why an organization didn’t receive funds, they do care about giving money to a board that meets excellent governing practices.
Family members can always be part of a nonprofit by volunteering or even being a paid staff member. They can use their skills to best serve the nonprofit and ensure the nonprofit is meeting inurement, conflict of interests and funding requirements. Of course they are wonderful for bouncing ideas and strategies around and receiving the solid support needed to run the nonprofit. Everyone in the nonprofit has tremendous value and leads to the success of the nonprofit.