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Nonprofit Organizations: Do I Really Need this Policy? Part 1

Are you thinking of forming a nonprofit organization but you are unsure of what documents should be included in your organizing paperwork? Nonprofit Organizations are formed in the state of Michigan by filing the Articles of Organization (or Articles of Incorporation) with the Michigan Department of Licensing and Regulatory Affairs. The organizers must then draft “bylaws” which are the operating manual for your nonprofit corporation. Your bylaws explain a members' rights and responsibilities, as well as establish the rules for governing your organization. The bylaws contain foundational information like the voting procedure and the number of board members required.

In addition to the by-laws of the organization there are other important policies the organization may want to consider adopting. In this two part blog post you will learn about why these policies are important and what should be included in them. This includes policies on the following topics: conflicts of interest, document retention and destruction, and whistleblowers and retaliation.

Your organization can either vote to adopt these policies as separate documents, or adopt a version of the policies into your bylaws. If you choose to adopt a policy as a part of your bylaws, it will be more solidified in your governing documents and will have greater voting requirements to change them in the future.

Now, let’s discuss Conflict of Interest policies and why nonprofits should consider adopting one.

CONFLICT OF INTEREST POLICY 

What is a conflict of interest? 

A conflict of interest appears when a person who is in a position of authority in an organization like an officer, director, or manager, has a private interest that might benefit from a decision they could make in their role. Additionally, decisions which benefit family members or businesses with which the officer is closely associated with, can also be considered a conflict of interest.[1]

What is the purpose of a “conflict of interest” policy?

Tax-exempt nonprofits must operate in a manner consistent with their charitable purposes or they can lose their tax-exempt status. Private benefits to individuals of authority in the organization is inconsistent with the meaning of charitable purposes.[2] A conflict of interest policy helps to provide a nonprofit with procedures that will help deal with conflicts of interest and attempt to avoid the appearance (or actual) private benefit to individuals in positions of authority in the organization.

By adopting a conflict of interest policy, the organization may ensure that when an actual or potential conflict of interest arises, the organization has a process in place for the affected individual to give notice to the organization about the situation. This will establish procedures which offer some protection against charges of impropriety involving officers, directors or trustees.[3] This is important because if your organization is subject to an investigation, the burden to proof the violation changes depending on if the organization’s adherence to the conflict of interest policy.

If there is an adequate conflict of interest policy in place within your organization––and you follow it––-the burden to prove a violation would fall upon the government. If there is not an adequate conflict of interest policy in place––or you do not follow it––– then the burden would be on your organization to prove that there was not a violation.

What should a “conflict of interest” policy include?

The Internal Revenue Service does not prescribe any specific requirements so your policy can be shaped to fit the needs of your organizations. Some general concepts which you should be sure to include are:

1.         Definitions of the kinds of scenarios which could be considered a conflict of interest

Examples include: if a person has a financial interest, directly or indirectly, through business, investment, or family. This also includes non-material benefits to the individuals and those they are closely associated with, such as decisions regarding disciplinary action against a close friend or family member associated with the organization.

2.         A Duty to Disclose

Requirement for individuals with any actual or possible conflict of interest to disclose that information to the designated directors or committees.

3.         Procedures for Addressing a Conflict of Interest

An independent committee should review the relevant information after an individual makes a disclosure without that individual present. The remaining board or committee members should vote to decide if a conflict of interest exists.

The governing board or committee can then determine by a majority vote of the disinterested directors whether the transaction or arrangement is in the Organization best interest, for its own benefit, and whether it is fair and reasonable despite the conflict and choose to pursue it regardless.

4.         What happens when someone violates the conflict of interest policy 

Your organization can determine what disciplinary action they see fit to include in your policy. Many organizations have policies which allow individuals believed to have violated the policy the opportunity to explain the alleged failure before pursuing disciplinary action.

5.         Executive Compensation Plan

Nonprofits are only allowed to provide their executives “reasonable compensation” for their work. “Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances.”[4]

The recommended process for determining the appropriate compensation is:[5]

1.     To adopt a written policy that the board will conduct a review of the executive’s compensation

2.     That review must include

                           i.          A comparison of compensation paid by similarly-sized peer organizations in the same geographic location.

                         ii.          Conduct and record meeting minutes of the review

Internal Revenue Service Sample

The IRS has posted a sample conflict of interest policy on their website. The IRS sample can be found on their page at “Instructions for Form 1023.” You will have to scroll down to “Appendix A” to find it. This is a great place to look and model your own policy off of. Take note that the sample policy does not prescribe specific requirements so you should edit the policy to fit your organization’s needs.

Make sure you keep an eye out for the 2nd post in this two part series on key policies nonprofits should consider adopting!

By Jessica Gracik

[1] I.R.S., Form 1023: Purpose of Conflict of Interest Policy (Sep. 21, 2023) https://www.irs.gov/charities-non-profits/form-1023-purpose-of-conflict-of-interest-policy.

[2] Id.

[3] Id.

[4] I.R.S., Instructions for Form 990 Return of Organization Exempt From Income Tax, 87 (Dec. 7, 2022) https://www.irs.gov/pub/irs-pdf/i990.pdf.

[5] Id. 



 

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