Can a Nonprofit Founder Be Paid? Why It’s Rarely a Good Idea
One of the most common misconceptions among new founders is the belief that starting a nonprofit can create a long-term paycheck for the person who forms it. While it is legally possible for a founder to be compensated, the process is far more complicated than many people realize and often creates more risk than benefit.
Payment to a founder is allowed in narrow circumstances, but it comes with heightened scrutiny, additional compliance obligations, and potential consequences for donor trust. In many cases, it is not a best practice and not something we recommend for most organizations.
Here’s what nonprofits need to understand before considering this option.
A founder can be paid, but with limitations
The IRS does not prohibit paying a founder who works for the organization, but compensation must be:
Reasonable
Approved by an independent board
Supported by salary surveys and documentation
Founders may not determine their own pay. If they are also on the board, which many wish to be, this creates an immediate conflict. Compensation decisions must be made by disinterested directors, meaning the founder must recuse themselves entirely from the process.
Salary surveys, such as those published by the Oklahoma Center for Nonprofits or national benchmarking reports, are essential for demonstrating what reasonable compensation looks like for similar roles.
For additional guidance on how boards should approach these decisions, read our blog on the financial responsibilities of nonprofit board members.
Where this appears on Form 990 and why it matters to donors
Payments or compensation to directors are disclosed in several places on Form 990, and some of those disclosures appear on page one, which is the most visible section of the return. This is intentional. The IRS wants donors and the public to see whether a nonprofit is compensating its governing body or engaging in arrangements that could suggest self‐benefit.
Payments or compensation information also appears in Parts VI and VII and may require further explanation on Schedule O. These pages detail board independence, business or family relationships, and whether anyone involved receives compensation that could compromise independent oversight.
Because Form 990 is publicly available, donors may interpret founder pay, particularly when paired with board service, as a red flag.
When payment crosses into self-dealing
Paying a founder becomes self-dealing when the founder sits on the board and participates in decisions that affect their own compensation or benefits. In that case, the IRS views the arrangement as the organization supporting an individual rather than carrying out charitable work.
Self-dealing is not illegal in every form, but it must be reported, monitored, and avoided whenever possible. It also raises questions about governance, independence, and donor trust. Many donors treat founder compensation as a negative..
Even when a founder does not sit on the board, the arrangement still invites scrutiny. The IRS expects nonprofit boards to act on behalf of the public, not the founder, and compensation decisions must reflect that duty.
Complications beyond compliance
Even when technically allowed, founder compensation creates several challenges, including:
Optics and donor confidence
Supporters may question whether the nonprofit exists to fulfill a charitable mission or to provide a salaried role for its founder.
Board independence concerns
A board that approves compensation for the person who created the organization, particularly when family members serve on the board, must demonstrate strong independence and transparency.
Start-up realities
New nonprofits typically do not have the financial capacity to pay a full salary. Founders often assume compensation will begin quickly, but most organizations take years to build revenue and fundraising stability.
Misunderstanding ownership of nonprofit assets
Founders sometimes assume they “own” what the nonprofit owns, especially when they helped purchase or use the property. Legally, nonprofit assets belong to the organization, not the individual, and cannot be treated as personal property. Confusion in this area can create serious legal and financial problems.
Additional reporting complexity
Compensation decisions must be documented, justified, and disclosed across multiple sections of Form 990 and supporting schedules.
Why paying a founder is rarely recommended
From a legal standpoint, paying a founder is allowed. From a compliance, governance, and fundraising standpoint, it is risky.
The core problem is perception. When the founder is compensated, especially while also serving on the board, it can appear that the nonprofit was created to support an individual rather than serve the public. That perception alone can jeopardize donor relationships — even when everything is technically compliant.
For most organizations, the cleaner, more sustainable approach is to maintain an independent board, ensure compensation decisions are handled by people without conflicts, and avoid arrangements that blur the lines between personal and organizational benefit.
A related misconception is that individuals sometimes assume they can serve as the “sole member” of a charitable nonprofit to maintain full control. Although this may be allowed under state law, it creates significant reporting requirements with the IRS. Only another charitable entity, not a person, should be the sole member of a 501(c)(3). This reinforces why nonprofits must have an independent board whose fiduciary duty is to the public, not the founder.
How Nonprofit Solutions Law can help
Navigating founder compensation requires a clear understanding of IRS rules, governance requirements, and donor expectations.
Our team helps nonprofits:
Determine whether compensation is appropriate
Structure board processes to maintain independence
Ensure compensation is reasonable and properly documented
Understand where disclosures appear on Form 990
Avoid conflicts of interest or self-dealing concerns
If your organization is considering compensating a founder or reassessing an existing arrangement, the Nonprofit Solutions Law team can help you evaluate the risks and establish a compliant, transparent process.