The short answer is: it depends.
Generally, the question of payment is spelled out in the nonprofit’s bylaws by the individuals who form the organization.
Nonprofit organizations are formed to help serve the public good. Any profits the organization makes go back into the coffers to continue the good work. The intent is to serve a purpose and a need that isn’t being met elsewhere. It isn’t to enrich one individual, or several, so paying nonprofit board members may be counter-intuitive.
The Board Of Directors
These are individuals who manage the organization and oversee how the organization operates. While they aren’t involved in the day-to-day operations as volunteers or employees are, they meet on a regular basis, according to the organization’s bylaws. More information is available from the Illinois General Assembly website.
The board usually consists of:
- Executive Director
- Vice President
One of these individuals may serve multiple roles, particularly with startups, out of necessity. But if the individual is being paid as a staff member as well as serves on the board, he or she should not be involved in the discussion or vote of their compensation.
“Receive No Material Profit”
This is one of five basic guidelines set out by the Illinois Attorney General’s office on their website, emphasizing that board members are unpaid volunteers. An organization can reimburse board members for expenses as well as costs they may incur while carrying out duties for the board, such as car mileage. Expenses that are not reimbursed may be tax deductions for the board members.
Note that while most nonprofits are generally exempt from paying taxes, they are still subject to all employer-employee taxes and regulations.
Illinois law prohibits loans to directors and officers by the nonprofit organization.
If Board Members Are Paid Or Compensated
Many larger nonprofits actually do pay their board members, such as healthcare organizations. But any time a member is paid more than $600 per year, they must be issued an IRS Form 1099
Board members who are paid may lose their immunity in certain types of lawsuits that may be filed against the organization, and can be held personally liable.
Conflicts Of Interest
An additional reason to have volunteer, non-paid members of the board of directors is to avoid any conflicts of interest. This is also the reason most boards don’t have a staff member. The IRS’ new Form 990 specifically asks about disclosure of any possible conflicts of interest. Even the appearance of a conflict of interest can be problematic.
Sometimes a conflict can occur because an individual isn’t aware of the boundaries, or hasn’t been informed. This is where the bylaws are useful, and creating guidelines to avoid potential conflicts.
A conflict can also include situations that may appear to enrich or benefit a specific board member because of his or her status. The IRS calls this receiving “an inappropriate benefit.”
Still, a paid board member may be a conflict of interest because of the interest in receiving payment, no matter the amount. The IRS gets concerned and wants to make sure that these private individuals aren’t unfairly receiving assets that are intended for the good of the people the nonprofit serves.
If your organization decides to pay board members, it’s a good idea to have a policy in place that puts the nonprofit first and avoids any conflicts of interest.
Chicago’s Nonprofit Attorney
James C. Provenza is a leading Illinois non-profit attorney with years of experience navigating the complex legal landscape surrounding nonprofit organizations and the issues they face. Call our firm today at (847) 729-3939, or use our online contact form. We can help you start your nonprofit and run it well for many years to come.