Even though the details of those allegations are still part of ongoing legal proceedings, the underlying lesson is clear: the way nonprofit money is handled matters as much as the way it is raised.
How can Nonprofits Pay People Legally?
One common misconception nonprofit leaders have is that nonprofits cannot generate revenue or pay employee or contractors a livable wage. That is not correct. Nonprofits can (and should) pay people providing services to them for their efforts when they are able. Many nonprofits operate with a mix of volunteers, paid contractors, and paid employees. As long as the nonprofit is following applicable HR and payroll rules in the states the employees live, they can absolutely pay their workers.
What matters is how that compensation is structured.
Organizations typically pay staff through:
- W-2 employee compensation
- 1099 independent contractor payments
- Reimbursement of legitimate work-related expenses
For example, a nonprofit employee traveling for organizational work could reasonably be reimbursed for mileage or lodging. But expenses unrelated to the nonprofit’s mission, such as personal purchases or unrelated household expenses, would not be permissible uses of charitable funds.
Maintaining a clear boundary between personal finances and nonprofit finances is one of the most important compliance practices for any organization. It’s a key mistake made for many small nonprofits starting out. Always be sure the nonprofit has its own bank account in the name of the organization, not in a founder or board member’s name. Doing this improperly can lead to individuals getting hefty tax bills during tax season.
Can you accept donations via Cashapp, Venmo, etc.?
The episode also highlights a practical issue many newer nonprofits encounter: accepting donations through personal payment platforms. Platforms like Venmo, Cash App, and similar tools have become common for digital fundraising. Some platforms now offer nonprofit-specific accounts designed for organizations.
However, donations should go directly to the nonprofit’s account, not to the founder’s personal payment account. Again, using a personal account can lead to the IRS classifying the funds as income for that individual that are subject to taxes. This can lead to that person needing to pay taxes on those funds.
Using personal accounts to collect donations creates several risks:
- It blurs the financial record of where funds came from and where they went.
- It complicates accounting and transparency, often leading to higher audit or accounting costs for the nonprofit.
- It prevents the donor from being able to take a tax deduction because the funds would not quality as a donation.
For donors and regulators alike, transparency matters. A clear financial trail helps demonstrate that charitable funds were handled responsibly.
What are Private Inurement and Excess Benefit?
Private inurement occurs when a nonprofit’s resources improperly benefit insiders, such as founders, board members, officers, or individuals who have significant influence over the organization. Nonprofits can provide reasonable compensation for services, but insiders cannot use their position to extract financial benefits beyond what is appropriate. Closely related to private inurement are excess benefit transactions, which involve situations where insiders receive compensation or financial arrangements that exceed fair market value.
For example, a nonprofit might lease property from a board member or hire a board member’s company for services. Those arrangements are not automatically prohibited. But they must meet specific safeguards to ensure the nonprofit is the primary beneficiary.
A Practical Example: The Roofing Company Scenario
Robert offers a practical example that many boards encounter.
Imagine a nonprofit that needs a new roof after a storm. One of the board members happens to own a roofing company and offers to submit a bid for the project.
Is that allowed? Yes, but only if certain safeguards are followed.
- First, the board member should disclose the conflict of interest and recuse themselves from any discussion or vote on the matter.
- Second, the board should gather comparability data, such as additional bids or pricing information, to determine what constitutes a reasonable cost for the work.
- Third, the organization should document the process in its records, including meeting minutes and copies of the bids reviewed.
If the board ultimately determines that the board member’s company offers a fair and reasonable option, it may choose that bid. The key is that the decision is made independently and transparently.
The Three Safeguards That Protect Nonprofits
Robert outlines three core practices nonprofits should follow to avoid conflicts and excess benefit issues:
- Independent Decision-Making
Individuals who stand to benefit from a transaction should not participate in the vote. Related individuals may also need to recuse themselves.
- Comparability Data
Organizations should gather information showing what similar services or compensation typically cost. This helps demonstrate that the arrangement is fair.
- Documentation
The board’s decision-making process should be documented through meeting minutes, board packets, and other records.
Strong documentation shows that the board exercised due diligence and followed proper governance procedures.
A Common Nonprofit Myth
At the end of the episode, Olivia introduces a nonprofit myth that many founders wonder about:
Can you start a nonprofit to raise money for just one sick relative or neighbor?
The answer is generally no.
Nonprofits must serve what is called a charitable class, a group of people, animals (or something/somewhere) large enough that helping them benefits the public, but small enough that it is defined. For example, a nonprofit could be created to help children with leukemia, inspired by one child’s experience. However, the organization must be structured to help others in that category as well.
Limiting an organization’s activities to a single individual or family would not typically meet the requirements for charitable status.
Why Governance Matters More Than Headlines
The dramatic elements of this case may feel far removed from the reality of most nonprofit organizations. But the underlying lessons apply to organizations of every size.
Many compliance issues begin with much smaller missteps:
- Donations flowing through personal accounts
- Informal decision-making without board oversight
- Lack of conflict of interest policies
- Poor documentation of financial decision
Over time, those small governance gaps can grow into larger, more expensive risks. The most effective way to protect a nonprofit’s mission is not reacting to problems after they arise.
It is building strong processes early: clear financial separation, transparent governance, and documented decisions.
Learn More and Stay Connected
If you’re looking for reliable answers to your nonprofit’s most important legal questions, visit charitableallies.org for free resources, guides, and case studies designed to support nonprofit sustainability.
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Note: content in this podcast and article are legal education, not specific legal advice.
