When the IRS examines a 501c3 application, one of the major issues they are looking for is any potential conflict that exists. This conflict of interest could exist between the non profit organization and its board members, directors, trustees, or key employees. In my experience working with clients who are applying for their 501c3 status, I have seen many situations arise in which a conflict of interest presents itself and may jeopardize the approval of the application. Even if this issue does pass the initial review completed by the IRS, if the conflict of interest is not addressed and dealt with appropriately, it could jeopardize future compliance with the IRS as well as damage the organization’s reputation; which, in turn, will damage funding.

Conflicts of interest in non profit organizations must be addressed very seriously whether they seem small or large. How an organization manages conflicts of interest that arise will determine whether an organization is frequently involved in legal problems and public scandals or actually accomplishing the organization’s mission. Conflicts of interest can arise whenever an individual, who has authority or decision-making power in a non profit organization, will privately benefit from a transaction, agreement, or activity of the organization.

One simple example of a conflict of interest is a board member with voting rights who will also be employed by the organization for other duties. The board of directors are responsible for reviewing and approving a non profit organization’s budget which would include the salaries and compensation of employees and independent contractors. If one of your board members will receive compensation then an obvious conflict arises if this board member has the authority to set his or her compensation.

There are multiple ways to deal with this issue, some more extreme than others. For example, one solution would be to remove the board member from the board of directors altogether. However, such as drastic step does not need to be taken. A typical solution to such an issue would be to have this board member abstain from voting on his or her’s individual compensation. This in turn allows the board member to remain on the board and receive compensation for their duties as an employee, while avoiding a dangerous conflict. Although this issue may seem obvious, many board members do not see some of the more discrete conflicts of interests that arise throughout the lifecycle of their organization.

A useful way to discover if a conflict of interest exists during a decision-making process is to check and see if a decision will benefit any of your director. Of course, this will require all of your directors to be upfront and honest about any aspect of the decision that may benefit them.

Another asset to your organization is your conflict of interest policy. When you organization applies for its 501c3 tax exempt status, the IRS requests that you adopt a conflict of interest policy and submit it with your application. However, you should always remember that this policy serves as a guideline and cannot replace careful consideration and an ethical approach to any decision made by a board. Each member of your Board should be required to acknowledge acceptance of the conflict of interest policy on an annual basis, and the policy should be reviewed at the initiation of all Board meetings. This will serve as a key reminder to every decision maker about their responsibility to disclose and avoid any conflicts of interest.

Non profit board members and executives must not only be able to recognize potential conflicts of interest, but they must determine when these conflicts present areas of concern and what to do about them. This can be a great responsibility and should be taken seriously – your organization’s 501c3 tax exempt status and your future funding depend on it.