When starting a nonprofit, selecting members for your board of directors is one of the most essential steps you can take to make it a reality. But before choosing board members, it’s important to understand the basics so that you can avoid common mistakes in the long run and remain compliant with the IRS.
In this article, we will be answering some common questions we get about nonprofit boards so you can build a strong foundation for your organization.
Does my nonprofit need to have a board of directors?
Every nonprofit organization is legally required to have a board to oversee its activities, and the IRS generally requires nonprofits to have a minimum of three members. Your nonprofit’s board will play an important role in how your organization is governed. Whether the board is making informed decisions about how the nonprofit operates or managing legal and financial risk, they act as the top of the chain of command.
While your nonprofit’s staff and/or volunteers work to keep its programs running smoothly on the ground, your board will spend more time on the big-picture items like ensuring the nonprofit’s programs are in line with the overall organizational goal or creating a strategic plan. As nonprofits grow and change, so do their boards’ role, so keep this in mind along the way.
Who can (or cannot) be on my board of directors? Can board members be related?
A typical board of directors has three or more members, the majority of whom are unrelated. “Unrelated” simply means that the members cannot be related to you or each other by blood, marriage, or business (for example, two people who own a business together). You can have some related board members, but typically you must have additional members that can out-vote the related members. This is because related board members may pose a conflict of interest for your organization. A conflict of interest, in this case, is a transaction or arrangement that allows a person to gain personal benefits from their official position.
The exception to this rule is for private foundations. However, just because it is permissible for the board majority to be related by blood or marriage does not always mean it is advisable. Consulting with a nonprofit attorney may be in order to help you understand best board practices for your specific organization’s situation and state guidelines to make sure you don’t run into any issues with the IRS.
What kind of people should I select to be on my board?
Your board members should be people with a high degree of integrity, passion for your mission, and leadership experience. The people you consider for your board should be ready to advocate for your organization while also providing a level of relevant skill, which could include having a learned professional such as a lawyer, accountant, marketing expert, or someone with deep knowledge of your programming areas. This range of experience will ensure your board is covered by a wealth of trusted perspectives. For example—you may have strengths in management, but if event planning is challenging for you, a board member who has this strength can assist when it’s time to host fundraising events.
Keep in mind your audience and the demographic you hope to serve. For example, if your nonprofit will serve homeless veterans, having veterans on your board will allow for veteran voices to be represented in the organization’s decision making processes.
Personality-wise, it makes sense to select board members who possess traits that fit with you and your organization. This does not mean that every board member needs to be in agreement on every issue—it can also be helpful to have a member or two who can balance out the table and play devil’s advocate. These “rabble-rousers” can provide helpful input when they thoughtfully counter ideas to protect the organization’s best interest.
Lastly, when choosing board members, ensure that you educate them properly about their roles and duties to the organization. Your board is obligated by law to attend to these three duties, and failing to educate them properly can result in disastrous consequences for your organization that could include expensive liability. You’ll want board members who are team players, committed to avoiding these common board mistakes.
Can Board Members be Compensated?
There certainly are some instances where board members are compensated. For example, it is not uncommon for boards of large, complex institutions (like healthcare systems) to be paid for their service.
However, the vast majority of board members serve as unpaid volunteers, dedicating their time, money and expertise to the nonprofit’s mission and operation. While there is no federal law that prohibits board members from being compensated, it is common practice for most nonprofit organizations not to pay their boards. There are several reasons for this:
- The IRS penalizes nonprofit organizations with board salaries they consider “excessive,” and the process to determine reasonable salaries includes extra steps and documentation that not all nonprofits find worthwhile.
- There are plenty of non-monetary benefits to being a board member, such as the expansion of professional networks and the ability to impact communities for the better. Most board members volunteer their time simply because they believe in the nonprofit’s mission personally and need no incentive to do good.
- In some states, volunteer directors are provided more protection from liability. Since board members can already face personal liability in certain circumstances, it may not be worth it to take this chance.
- Conflict of interest concerns may arise when board members are receiving compensation—and the general public is wary of nonprofit leaders with exuberant salaries. Since transparency is key for nonprofits, consider how a potential donor might feel if they learned how much your board makes.
- Many nonprofits don’t have the budgetary margin to compensate board members without detracting from their programs.
- Volunteer board members can still be reimbursed for their travel expenses, or deduct expenses they incur when their work is in connection to the organization, if the nonprofit’s policies allow for this.
Once you understand how to put together a board, you can take this significant step into starting your nonprofit. If you’re preparing to start a nonprofit and wondering if you’re ready, sign up here for free resources and other helpful articles sent straight to your inbox. We’re here for you no matter where you’re at in your startup journey.