Nonprofit Series Part 4 of 4: Establishing a Board of Directors

In the final installment of his nonprofit series, Toby Mathis, Esq., answers frequently asked questions about forming leadership teams for nonprofits and how nonprofit executives are paid.

Updated September 27, 2021

If you’re considering forming a nonprofit, you may have some questions about how to form a leadership team for this type of organization. A common question I receive about setting up a nonprofit is, “Can the founder of a nonprofit also be on the board of directors?”

In short: absolutely. When thinking about nonprofits or any other entity (whether for-profit or not), remember that there are three main fronts that entity will have to deal with: the federal government, the state government, and third parties. The question of establishing a board of directors or other organizational leadership structure falls under the front of “third parties.” The organization’s leaders and their titles are third-party-facing details. It’s paperwork.

In considering how to structure the leadership of your nonprofit organization, one of the most important things to know is your state’s laws surrounding this area. Here in Nevada, where three of Anderson’s offices are located, state law allows for nonprofit boards of directors with only one member. And yes, that one member can be the founder, at least in Nevada.

Generally speaking, I would recommend that, no matter what, you should have at least two outside directors on your nonprofit’s leadership team. There are all sorts of different professionals who could fill this role, including outside board members you can hire for a fee who’ll consult on whether the nonprofit is set up and operating efficiently. You may not even have to pay them a salary: some may work for a highly-reduced fee or only fringe benefits.

Keep in mind that, when I say “board of directors,” I’m using corporate terminology. I like to see nonprofits as corporations run by boards of directors as opposed to boards of trustees. My preference stems from the IRS’s preference. The IRS is used to seeing nonprofits as corporations and, here at Anderson, we’ve never had a nonprofit we’ve set up be denied its exemption. So, I tend to go with what I know will always work.

Are Nonprofit Board Members Paid?

The answer to this is another “it depends.” Nonprofit board members can certainly be paid, but they don’t always have to be paid a salary. They can alternatively be paid with tax-free fringe benefits. Ultimately, the way board members of a nonprofit are paid works the same as in the for-profit realm.

A word of caution: if you’re paying someone who has a conflict, or someone with a high salary, it’s wise to request a third-party review to make sure the arrangements are reasonable. The last thing you want as a new nonprofit founder is to have transactions that appear to be distributions or profits, blowing your tax-exempt status.

Can One Person Hold Two Officer Positions?

Yes, but beware: it depends on the laws of the state the nonprofit is in. It’s not unusual to see nonprofits with all officer positions held by one person. In these cases, the positions in question are usually the president, treasurer, and secretary, or the president, vice president, treasurer, and secretary.

Whatever the case, yes, one-person corporations are allowed by the federal government. The state government may conflict, however, so it’s important to check your state’s statutes before acting to ensure you follow the letter of the law.

Can the Founders of a Nonprofit Receive a Salary?

Again, the answer here is yes. More importantly, the founder can also retain control over the organization. The founder can retain veto power, then bequeath that veto power to their children or heirs. In this way, the founder can ensure control of the nonprofit even after their passing, resignation, or incapacitation.

Can a CEO be on a Nonprofit’s Board of Directors?

Yet again, the answer here is yes. Basically, terms like “CEO” are terms of art. When establishing a leadership structure for your nonprofit, you can choose to have a CEO, an Executive Director, or perhaps another officer title. Furthermore, you can hold both an officer title and be on the board of directors simultaneously.

Many of my clients want to have an executive director for their nonprofits, someone who leads the organization like the chairman of the board. This can still be the founder. Moreover, you can still exert significant control over the organization as long the organization’s activities don’t involve any private inurement, by which I mean that the benefits and/or profits aren’t going to you as the founder but stay in the nonprofit for it to pursue its mission.

Assigning fancy titles is more for third parties. You can have different categories of officers at your discretion, as long as there are no restrictions in your state. Yet again, it comes down to state-specific statutes.

How Does a Nonprofit Pay its Employees?

There are two main types of nonprofits: private foundations and operating charities. Operating charities conduct activities for the benefit of third parties (specific populations or groups), whereas private foundations exist to support operating charities. In my opinion, it’s much better to be an operating charity than a private foundation.

Regardless of type, nonprofits pay their employees in the same way that for-profits do: through wages or compensation for service or time provided. The main difference lies in what these different entities do with their profits. In short: nonprofits don’t pay out profits to employees.

In a for-profit corporation, there are shareholders and, in the case of profits, dividends may be issued. With nonprofits, however, there is no such thing as dividends because there’s no such thing as shareholders. Nonprofits do not have shareholders.

Nonprofits can be an extremely powerful tool for legacy planning, as well. Some of my wealthy clients may be concerned about leaving their kids a large lump sum upon their passing. My advice, in this case, is to put the kids on their nonprofit’s board of directors. This means that the kids will have to actually do something to receive that money, as opposed to a windfall.

Additionally, nonprofits aren’t required to distribute their profits. You can leave the money in the nonprofit and it just snowballs. As they grow, nonprofits have the habit of gaining much more momentum than their for-profit counterparts due to the fact that money isn’t constantly being cut from the top via taxes.

Nonprofit power is undeniable. If you’re interested in learning more about harnessing the power of nonprofits to do good and build a legacy, request your complimentary consultation now. On the call, one of our professional Advisors will go over your options and how to make your vision a reality. Click here to claim your free consultation now, or call 800.706.4741.

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