Our nonprofit preschool just purchased a building and the president of the board has been trying to get us to pay off the mortgage in 1/2 to 1/3 the time. Since she is a broker and will handle the details, she will make a huge commission on the $350,000 purchase price. The bylaws say that board members can not work for the preschool. Can she do this?
Although some organizations adopt policies that prohibit any conflict of interest transactions with members of the board, there is no state law or tax law that provides an absolute prohibition. The tax law makes the transaction subject to the excess benefit rules, and the board should be sure to follow the safe harbor provisions in any dealings with a director. If it does the transaction it should make sure that it is in the best interests of the school and that the price is fair and reasonable. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”)
Whether it violates the bylaws is a question of interpretation. Do the bylaws say that a director may not be an employee of the school, or that directors may not be compensated for any services? It may make a difference on whether the transaction is prohibited. Simply because it is not prohibited, however, does not mean that you have to do it if you don’t think it is appropriate. You can always say No.
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