Can I have Family Members on my Nonprofit Board of Directors?
Caveat: It’s important to preface this response, and many other questions like it, with this caveat: This is the customer’s file – not ours! We make recommendations, and 99% of our customers adopt them. Some issues, like this one, have gray areas, where the IRS will not categorically reject an application based upon this issue – while other activities or structural issues will automatically get your application flat-out denied.
Our team at InstantNonprofit is focused on preventing any potential issues from slowing down or stopping your journey to IRS 501(c)3 Approval.
If any customer chooses not to adopt our recommendations, we may simply notify them that our assurances and guarantees of rapid IRS approval, as well as our 100% guarantee of approval will not apply.
Outside of endorsing or submitting any information we know to be unethical, fraudulent, or illegal, our #1 charge to help our customers get their nonprofit up and running as they see fit! Like any business, project, or life calling, there are myriad ways to set up, fundraise, and operate a 501(c)3 nonprofit.
Regarding the question of building your Founding Board or in considering the makeup of your Board in the future, we are occasionally presented with the nonprofit Founder’s desire to appoint or elect a majority – or even 100% monopoly – of family members to their Board of Directors.
Before addressing the issue of the makeup of your Board, it’s important to touch upon the purpose of the Nonprofit Board of Directors.
One of the primary ways a nonprofit is different than a for-profit is the critical role the Board plays in its governance (i.e., its decision making). While a for-profit company has two levels of ruling governance (the Board as well as the Shareholders), in a nonprofit, there are no shareholders to step in upon the even of a failure/collapse of the Board due to a deadlocked vote (cause by an even number of board members, evenly split on a decision), death, medical or any other reason.
That makes a nonprofit’s Board of Directors the all-powerful decision-making body, and therefore it is extremely important that the Board be set up to be durable. One of the most important ways to achieve that is to have a solid set of rules for Succession of Directors in the organization’s Bylaws.
While the IRS has relaxed its stance on the majority of members of the Board being family members, allowing a majority of your Nonprofit Board of Directors to be comprised of family members, a total monopoly of family members is frowned upon, and may cause your application to be delayed or rejected, until a more independent Board makeup is arranged.
So, while we recognize that trusted family members are often preferred and may be part of an application that is approved by the IRS, we recommend that your board non consist of 100% family members.
Again, any customer is welcome to ignore any of our recommendations, submit the application, and see if the IRS will approve your preferred Nonprofit Board of Directors makeup!
Remember, since this IRS process is staffed by humans, and because there is not a hard-and-fast screening process that automatically detects and rejects applications based upon Board makeup, there is a significant likelihood that the IRS Tax-Exempt Status will be approved with 100% family members or business partners occupying all seats on the Board.
Our philosophy is to avoid even the appearance or potential for issues; therefore, most often, we recommend immediate family or spouses holding two of three Board of Director seats (and 2 of 3 or even 3 of 3 Officer positions of President, Secretary and Treasurer). Sometimes the relationship is siblings, or parent/child (18 or older), with Director outside of your immediate family.
If the IRS sees that every single person on your board has the same last name, that is potential IRS Red Flag for conflict of interest and you will risk your application being rejected. We check for this and many other “Red Flags” as part fo our 501(c)3 Formation Packages.
Below is the Nonprofit Board of Directors structure we often see for new, small nonprofits with three to five members: