Compensation, conflicts, and related parties: what your nonprofit needs to know

ARTICLE | October 01, 2026

Nonprofit boards make decisions every year about compensation, vendors, contracts, and relationships with affiliated organizations.

Most of those decisions are routine. But when someone with influence over your nonprofit stands to benefit, you need to look more closely. 

The issue isn’t simply whether the transaction is allowed. It’s whether the terms are reasonable, the relationship was disclosed, and the documentation supports what happened. 

Those questions matter from a governance perspective, and they can also affect tax reporting, including Form 990. So when you're evaluating compensation, conflicts, or related-party transactions, there are a few important questions to ask.  

Who has influence over the organization?

First, you need to know who has influence over the organization. And the analysis doesn’t depend only on someone’s job title. An employee may have significant authority over the organization even if their title doesn’t include “president,” “treasurer,” or “chief financial officer.” Likewise, certain individuals may be treated as “disqualified persons” under federal tax rules because they are, or were, in a position to exercise substantial influence over the organization. 

Depending on the facts, that can include officers, directors, and trustees. It can also include senior executives, certain family members, and businesses those people control.

That matters because when someone with substantial influence stands to benefit from a transaction, you generally need to apply more scrutiny to the arrangement and the approval process. 

Is the organization receiving fair value?

A related-party transaction isn’t automatically improper. The key question is whether your nonprofit is receiving appropriate value in return. 

Let’s say your organization wants to hire a company owned by an executive’s family member for a $250,000 consulting engagement. 

That arrangement may be completely legitimate. But you should be able to show that the services were needed and the price was reasonable. You should also be able to show the relationship was disclosed, and that people without a financial interest made the decision. Comparable market data can be especially important.

The same concern can arise in other situations, like paying rent to a board member, approving executive compensation, or hiring a relative to provide professional services. 

These arrangements may all be appropriate. The risk comes when you pay more than fair value, give someone an unusually favorable benefit, or can't demonstrate how the terms were evaluated.

In some situations, that can create what the tax rules call an excess-benefit transaction. That can have real consequences. The person who received the excess benefit may owe an excise tax, and certain managers who approved the transaction may also face tax. If the excess benefit isn’t corrected within the required period, the tax on the recipient can increase substantially. And in some cases, the IRS can also consider whether your organization’s tax-exempt status should be revoked.

Was the decision independently reviewed?

You also need to ensure decisions are independently reviewed. This is where good governance practices become especially important. A conflict-of-interest policy is useful, but it doesn’t accomplish much if it exists only on paper. 

Potential conflicts should be identified before the decision is made. The people evaluating the transaction should understand the relationship involved, and anyone with a financial interest generally shouldn’t be driving the approval process. 

For significant arrangements, your board or committee may also want to review alternative vendors or market pricing to help show the terms are reasonable.

And don’t assume that an unpaid director is automatically independent. Certain business, compensation, or family financial relationships can still affect the analysis. 

Is the process documented?

Independent review is only part of the process. You also want a clear record of how the decision was made. 

A sound decision-making process is much easier to defend when the organization can show what actually happened. The board or committee minutes should reflect the substance of the review.

Good documentation answers a few basic questions. Was the relationship disclosed? What information was considered? Did you review comparable prices or compensation data? Who took part in the discussion, and who abstained? And what did the board ultimately approve?

This helps demonstrate that the board acted thoughtfully and independently. It can also be important later when the organization is preparing Form 990, responding to an auditor, or answering questions from a regulator, donor, or other stakeholder.

Ask better conflict questions

One reason conflicts are missed is that organizations sometimes ask questions that are too general. For example, simply asking if someone has a conflict of interest, often isn’t enough. 

Someone may honestly answer “no” because they don’t think of a particular relationship as a conflict. But more specific questions can produce better information. 

Instead, ask whether the individual or an immediate family member has an ownership, employment, or referral relationship with the vendor. Ask if they recommended or helped negotiate the arrangement. Also, ask if they or a family member could receive a direct or indirect financial benefit. 

The goal isn’t to assume wrongdoing. It’s to surface relationships early enough that you can evaluate them properly.

Related organizations deserve attention too

These issues aren’t limited to transactions with individuals. Your nonprofit may also have relationships with affiliated charities, subsidiaries, or other entities, such as supporting organizations, partnerships, and joint ventures.  

Those arrangements can create their own governance and reporting questions. For example, these organizations may share employees, office space, or directors.

One practical step is to maintain an updated legal-entity chart. It should show ownership, overlapping directors, and major transactions between the organizations. That can help leadership understand where potential conflict, compensation issues, or reporting obligations may exist.  

Where Form 990 comes into the picture

Many of these governance decisions eventually show up on Form 990. The return asks about governance practices, compensation, and board independence. It also asks about transactions with interested persons and related organizations.

An issue that wasn’t carefully handled during the year can become much harder to address when preparing the return. Form 990 is also generally a public document, so these disclosures may be reviewed by donors, grantmakers, regulators, and others outside your organization. 

That’s another reason to treat these matters as year-round governance issues rather than filing-season questions.

Ask the questions early

Before approving a transaction involving someone with influence over your organization, focus on a few core questions. 

Who benefits? Is the organization receiving fair value? Was the decision made independently? And is there documentation showing how the board reached its conclusion?

Those questions can help protect your organization, strengthen governance, and reduce surprises when tax reporting begins.

If your nonprofit is considering executive compensation, or a transaction involving a related person or organization, contact our office before the decision is finalized. We can help you review the tax and reporting implications, and identify documentation that may be needed.