Can a Nonprofit Board Member Make a Loan to the Organization?

  1. Church & Nonprofit
  2. Can a Nonprofit Board Member Make a Loan to the Organization?
Can a Nonprofit Board Member Make a Loan to the Organization?
Church & Nonprofit

It is not unusual – or illegal – for nonprofit board members to make a loan to their organizations for any number of reasons. Board members may lend money to a nonprofit to help it through a temporary cash crunch, start a new program that furthers the nonprofit’s mission, or even fund capital improvements.

While there are no legal obstacles to borrowing from a board member, these types of loans must be handled with caution so as not to run afoul of IRS regulations and thereby jeopardize the tax-exempt status of the nonprofit. Before making a loan, board members should first consult with their attorney and/or CPA for guidance.

One of the most common hazards that can arise from board members providing loans to their nonprofits is a conflict of interest. A conflict of interest can arise if a board member provides a loan to their organization that also benefits the board member. If an individual receives too much benefit from a transaction with the nonprofit – particularly if that person is somehow linked to the nonprofit in any of a number of key ways—then the IRS may choose to impose penalties on the nonprofit.

According to the IRS, the only parties that may benefit when a nonprofit enters transactions with third parties are the nonprofit itself and the third party—and that third party cannot be someone who is defined as a “disqualified person.” Any transaction that violates this principle is called an “excess benefit transaction.” A “disqualified person” is defined as someone who is:

  • A member of the leadership of a nonprofit,
  • Someone closely related to a person in a leadership role (such as a parent, child, or spouse), or
  • Any business or other organization whose ownership is more than 35% in the hands of such a person.

To avoid problems with the IRS, the board member must charge interest at or below the current market rate. In addition, the board must vote to approve the loan with the lender abstaining from the discussion and the vote, and all discussions about the loan should be well documented in board minutes. The nonprofit must also report the loan on its Form 990.

Provident’s nonprofit attorneys can help churches and religious organizations with risk management. We stand ready to counsel and serve churches, charities, and foundations, as well as private schools, colleges, universities, and other types of nonprofit organizations—providing broad transactional and general counsel services in Arizona and surrounding areas. Contact us to learn more.

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