For organizations exempt from income tax under Section 501(c)(3) of the Internal Revenue Code, the most important governance policy the organization can have is the conflict of interest policy. The policy is not only explicitly asked about for every organization in the Form 990 Informational Return but is also asked about in the Form 1023 specifically.
So, what specifically is a conflict of interest policy, why is it necessary, and how do you draft one for your organization?
What is a conflict of interest Policy?
A conflict of interest policy is, as the name implies, a policy adopted by an organization’s governing body in order to help address potential conflicts of interests that exist or may exist with board members, officers, or high level employees. A conflict of interest policy inherently recognizes that conflicts of interest often exist with an organization’s leadership and establishes procedures of how such conflicts are handled when the conflicts are disclosed.
Why is a Conflict of Interest Policy necessary?
When recognizing an organization as tax exempt under Section 501(c), the IRS is particularly concerned with private inurement and ensuring that no assets or profits of the organization are used to improperly enrich the insiders of the organization, especially those with decision making power. This is even more pronounced in the context of a 501(c)(3) organization when all assets of the organization must be used exclusively for charitable purposes. If an organization is found to have engaged in private inurement and to have excessively benefitted an insider of the organization, stiff penalties may be applied up to and including revocation of the organizations tax exempt status. A conflict of interest policy ensures that your organization has a process in place by which the governing body can address conflicts as they arise without fearing that a decision made will result in any issues of private inurement or excess benefit.
How do you draft a conflict of interest policy?
A conflict of interest policy should describe what a conflict is, who covered persons are, when and how a conflict is disclosed, and a process for how the governing body decides when a conflicted transaction exists. A conflict of interest policy should also mandate (1) that all persons with a conflict of interest in a matter before the governing body recuse themselves from the decision, (2) that the governing body perform due diligence to ensure that no non-conflicted transaction exists that could be more advantageous to the organization, and (3) that the decision be recorded in detail in the minutes of the governing body’s meeting. Finally, the policy should provide a method or questionnaire for all governing body members, officers, and high-level employees to fill out in order to determine whether any conflicts of interest exist. This process should be done regularly to ensure that the governing body is always apprised of all potential conflicts of interest that may come before it.
If you need help in preparing a conflict of interest policy for your organization, please feel free to call The Apex Law Group PLLC. We would be happy to help!
The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Jacob Ferrari at firstname.lastname@example.org.