Not for Profit Conflict of Interest
Consider the following scenarios:
- A board member of a not-for-profit private school also owns a construction company. The school uses the board member’s construction company to build a new school building.
- A board member of a not-for-profit athletics organization also owns a sporting goods store. The athletic organization agrees to buy all of its equipment from the board member’s sporting goods store.
Can you see how each of these scenarios presents a potential conflict of interest? How?
Board members of not-for-profit corporations are not permitted to financially benefit from the corporation’s assets. Board members and other employees may receive reasonable compensation for their time – that is, they may receive a salary. In some instances, that salary may be considerable. But board members cannot otherwise personally benefit from the not-for-profit’s assets. How does this relate to the scenarios described above?
When a not-for-profit board member stands to personally benefit from a contract, the potential for self-dealing arises. If a board member directs a not-for-profit to deal exclusively with a business that the board member owns, it appears as if the not-for-profit’s assets are being used to benefit the board member. The profits of the deal will certainly benefit the business, which is owned by the board member. What, then, is to stop a board member from turning the not-for-profit into the business’s biggest, or even only, client? With enough influence, a board member may effectively liquidate the assets of the not-for-profit in purchases that will financially benefit the board member’s business, to the detriment of the not-for-profit. If that happens, all of the contributions individuals made to the not-for-profit’s stated purpose will be diverted to the private benefit of the board member, which is precisely what the not-for-profit structure is supposed to avoid.
Not-for-profit corporations can avoid this by enacting written conflict of interest policies. These policies may, for instance, require board members to abstain from voting in corporate decisions that stand to benefit them personally. The fact that a not-for-profit deals with a board member’s business does not, alone, mean that a conflict of interest has arisen. Nor does it necessarily mean that something unethical has happened. But it is important to be on guard for the possibility. If suspicion arises, it is best to consult an attorney.
Corporate Counsel
The attorneys at the Law Firm of Vaughn, Weber & Prakope, PLLC can help advise not-for-profits on these and other corporate governance matters. Call 516-858-2620 to schedule a free consultation today.
Nonprofit Categories
Nonprofit Categories
New York’s Not-For-Profit Corporation Law contains four different nonprofit categories – A through D. The Department of State decides what category a nonprofit falls under based on the purposes the organization lists in its Certificate of Incorporation.
Type A is the most general category. Type A corporations can be created for any non-business purpose. Athletic and social clubs, for instance, may be considered type A.
Type B organizations are created for charitable purposes. Scientific, literary, religious or other organizations may fall under this category.
Type C organizations are created for business purposes. Basically, Type C organizations are businesses owned by nonprofits, such as thrift shops. These businesses can be considered non-profits if the proceeds go toward a parent nonprofit, rather than toward private individuals or other for-profit corporations.
Type D corporations are created for other purposes determined by state law.
An important distinction between types is that A and C types are “membership” corporations, while B and D types may not be. Members may or may not be beneficial to a non-profit, depending on the corporation’s purpose. Generally, “members” are individuals within the community the nonprofit serves that, after meeting certain qualifying criteria, become eligible to vote on certain corporate decisions.
Stay tuned for additional posts on this subject. We will be posting more information about nonprofit membership and corporate governance in the near future. In the meantime, if you have any questions about nonprofit incorporation, choice of legal entity, or corporate governance, feel free to call the Law Firm of Vaughn, Weber & Prakope, PLLC at 516-858-2620 to schedule a free consultation.
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