Identifying and Avoiding Conflicts of Interest in 501(c)(3) Nonprofits

People typically associate conflicts of interest with money, but financial transactions are only one part of the picture. In the nonprofit world, both real and perceived conflicts of interest can damage an organization’s credibility, integrity, and effectiveness — even if no money is exchanged.

Nonprofits routinely make decisions that involve relationships, partnerships, services, and funding. Often, those decisions are shaped by the people who serve on the board or in key leadership roles.

When personal, financial, or professional interests influence a board member’s decision-making, it can compromise public trust, undermine the nonprofit’s mission, and create legal risks, even when the intent is good.

Understanding what qualifies as a conflict of interest and how to identify, manage, and document those situations is essential for every nonprofit board.

What is a conflict of interest?

A conflict of interest occurs when someone in a position of authority within a nonprofit, such as a board member, officer, or key employee, has personal interests that could interfere with their ability to make impartial decisions on behalf of the organization.

That interference might be financial, reputational, relational, or strategic. A conflict may be direct, such as a board member’s business receiving payment from the organization, or indirect, such as influencing a decision that benefits a family member, business partner, or another nonprofit the board member is involved with.

Not all conflicts involve payment. A board member serving on two competing nonprofits, a parent voting on services that affect their child, or someone recommending a vendor they are personally close to are all examples of nonfinancial conflicts that can still compromise judgment.

Perception matters as much as reality. Even if a board member believes they can remain objective, the appearance of bias can still raise legal, ethical, and reputational concerns.

Actual versus perceived conflicts

Actual conflict involves a direct personal or financial benefit. A perceived conflict may not involve any real gain but could still raise concern about fairness, ethics, or influence.

In both cases, the concern is whether someone’s judgment could be, or appear to be, compromised. For public charities, the appearance of bias can be just as damaging as the reality. Transparency is critical, and all conflicts must be handled with care.

Private benefit and excess benefit transactions

The IRS prohibits 501(c)(3) organizations from providing private benefit to individuals outside of what’s necessary to fulfill the organization’s mission. A key area of concern is the excess benefit transaction, which happens when a person in a position of influence receives compensation or value beyond what’s considered reasonable.

This might include paying a board member’s company above market rate, giving a grant to a family member without proper vetting, or approving a housing or loan arrangement without independent review. These scenarios can trigger intermediate sanctions, which are penalties applied to both the individual and the organization.

Managing conflicts through policy and practice

A strong conflict of interest policy is not just a formality; it is a critical tool for legal compliance and good governance. At a minimum, your policy should define what qualifies as a conflict, require annual conflict of interest questionnaires from board members and key staff, and outline what happens when a conflict is identified. Board agreements can also help clarify expectations around fiduciary duties and reinforce the organization’s conflict of interest policy.

When a potential conflict arises, the person involved should disclose it fully. The board should then assess the situation, determine whether the relationship can be managed or poses too much risk, and document the decision in the meeting minutes. In many cases, the individual should recuse themselves from any discussion on the issue and from the vote.

If the board proceeds with a recommendation that involves a known conflict, minutes should clearly record the nature of the conflict, the process used to evaluate alternatives, the rationale for the final decision, and who was recused from discussion or voting.

The internal practices of disclosure, recusal, and documentation protect the organization if they are questioned about the perceived or actual conflict.

Why it matters

Even well-intentioned decisions can lead to problems if they are not handled transparently. Donors, funders, and regulators expect nonprofits to prioritize mission over personal gain.

Managing conflicts of interest proactively is not only a legal necessity but also a key part of board leadership and organizational credibility.

At Nonprofit Solutions Law, we help organizations create and maintain effective policies and procedures that align with IRS guidelines and nonprofit best practices. Whether you’re forming a new board, reviewing annual disclosures, or navigating a potential conflict, we’re here to help.

Contact our team today to get started.