Understanding Board Independence: What Every Nonprofit Should Know

ARTICLE | November 19, 2024

Authored by Vasquez + Company

Ensuring that your nonprofit's board members are independent is essential for effective governance and maintaining public trust. While avoiding conflicts of interest is a key element, the IRS defines board independence using a four-part criteria. Nonprofit organizations must adhere to these guidelines to avoid potential legal and reputational risks. This article explains the IRS's requirements, the importance of board independence, and best practices for maintaining a truly independent board.

Key Points:

• IRS Definition: Board members must meet specific criteria to be considered independent, such as not receiving significant compensation or engaging in transactions that provide material financial benefits.
• Reasonable Effort: Nonprofits should make reasonable efforts to collect information about their board members' relationships and financial ties for accurate Form 990 disclosures.
• Exceptions: Some board members may be considered independent despite receiving benefits, such as those who belong to a religious order or serve the group the organization benefits.
• Best Practices: It is advisable to have a majority of independent directors to build donor confidence and comply with IRS regulations, with specific committees needing to be composed of independent members.

For more details on board independence and best practices for governance, read the full article here.

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