Nonprofit Organization Conflict of Interest

A non-profit organization is a type of business that has very specific needs. They often exist to promote a charitable purpose. They are also subject to unique laws.

Because of these reasons, it is common for conflicts of interest to arise in a non-profit organization. In a broad sense, a conflict of interest can be defined as a situation in which an individual has a duty to promote one interest, but promotes another interest instead.

Whether or not a corporation can qualify as a non-profit depends on the activities it will perform. In general, the purpose of a corporation must be one of the following:

• Charitable;
• Educational;
• Literary;
• Religious; or
• Scientific.

In many cases, certain individual and groups qualify as non-profit organizations, including:

• Artists;
• Community service groups;
• Musicians;
• And religious-based organizations.

A non-profit organization is not required to pay any federal or state income taxes for activities related to its stated purpose. In addition, a private party that donates or makes a contribution to a non-profit may receive a tax deduction.

In order for the non-profit corporation to maintain its tax-exempt status, it cannot engage in any of the following activities:

• Contributing funds to political campaigns;
• Engaging in lobbying that would influence legislation to a substantial degree;
• Distributing profits to officers, directors or members; or
• Making a substantial income from any activities unrelated to its purpose.

The directors and officers of non-profit organizations are given broad discretion to manage the organization.  The business judgment rule protects directors and officers of a non-profit when they are making decisions on how to best manage the organization. Therefore, a director or officer of a non-profit will be held liable only in rare circumstances, such as acting in bad faith.

In most states, members of a non-profit organization cannot be held liable for the actions of the non-profit. Conversely, the non-profit will only be held liable for the actions of its members if they are acting as agents for the non-profit organization within the course and scope of the organization. Therefore, a member who is responsible for breaking the law will be held personally liable unless they were acting as an agent of the non-profit.

How can a Non-Profit Organization Limit its Liability?

There are several steps non-profit organizations can take to limit their liability. These may include:

• Purchasing liability insurance;
• Including limitation on liability clauses in contracts; or
• Implementing clear policies and procedures.

A non-profit organization has directors, which may also be known as trustees, and officers that make management and policy decisions, just as in a regular corporation. In general, the officers and directors are shielded from liabilities, such as debts and lawsuits, involving the corporation. Although non-profit organizations do not have shareholders, or owners, they may have members with voting rights.

What are Conflicts of Interest in Business Law?

Business conflicts of interest usually refer to situations in which an individual’s own private interests conflict with their professional responsibilities or interests. In many situations, these conflicts of interest involve a breach of the individual’s duty of loyalty to their business organization or corporation.

The fiduciary duty of loyalty is a fiduciary duty in which an individual, known as a fiduciary, who is acting on behalf of another individual to manage their assets, must act in the best interests of another. The law requires this fiduciary to act in good faith and with honesty and fairness. A fiduciary is not permitted to be involved in any conflicts of interest, self-dealing transactions, or any other actions for their personal advantage. 

A conflict of interest may occur, for example, when a corporate member is on a board of directors for a corporation. The member owes the corporation a duty of loyalty as a fiduciary. If the member takes advantage of certain business opportunities to the detriment of the corporation, a conflict of interest may exist.

Common examples of conflicts of interest in a business setting, which may also apply to non-profit organizations, may include:

• Self-dealing: This occurs when a director or officer enters into a transaction with another organization that benefits the director or officer, but causes a detriment to the company;
• Gift issues: Many business laws may prohibit officers from receiving gifts from any individual or company with whom they do business in order to help dissuade bribery issues;
• Outside employment conflicts: These may occur when a corporate official is employed with multiple companies. The employee’s interests at one company may not conflict with their interests in the other;
• Confidential employment conflicts: These may include: 
  • Trade secrets; 
  • Insider trading;  
  • Securities fraud or other types of securities violations;  
• Family interests, or nepotism: Nepotism occurs when an individual is hired based on their familial relationship with a director or officer and not based on their qualifications for the position.

How do Conflicts of Interest Affect Non-Profit Organizations?

A business conflict of interest can be challenging for any type of organization. However, these conflicts may be of particular concern for a non-profit organization due to its nature. Many non-profit organizations deal with donations or charitable giving. Therefore, any conflicts of interest may be problematic for the organization.

A conflict of interest in a non-profit organization typically implies that an employee or director has breached their duty to promote the best interests of the non-profit organization. This often occurs because an employee had an interest in a competing organization or with a donor. 

What are Some Examples of Non-Profit Conflicts of Interest?

Examples of conflicts of interest that occur within a non-profit organization may include:

• Key employees of the organization are financially interested in a donor company;
• Employees of a non-profit organization are being temporarily loaned to other companies;
• Employees of the organization are accepting improper gifts from outside donors or vendors;
• Employees are acting as insiders in a different company;
• Employees with a conflict of interest are being represented by the same attorney; or
• There are organizational fundraisers that are offering financial advice to donor parties.

Other types of conflicts of interest may occur, especially when temporary contract arrangements with third party actors are involved. For example, many non-profit organizations sponsor events or undertake small projects with local businesses. In these cases, it is important to form an agreement that is free from a conflict of interest.

How Do I Handle a Conflict of Interest?

Every non-profit organization should have a policy that states what should occur in the event a conflict of interest arises. Typically, this will be stated in the non-profit organization’s bylaws. If that is not done, the non-profit can create a separate and distinct policy from the bylaws that deals with conflicts of interest.

If a conflict of interest does arise, legal action may be necessary. A conflict of interest may result in a lawsuit for monetary damages. It may also require the non-profit organization to take action, such as terminating an individual who has violated laws as a result of the conflict of interest.

Do I Need a Lawyer for Help With a Non-profit Conflict of Interest?

It is essential to have the assistance of an experienced business lawyer for any non-profit conflict of interest issues. Conflicts of interest can be especially problematic for non-profit organizations. There are, however, steps that can be taken to minimize their occurrence. 

An attorney can review any bylaws or policies, assist in drafting or editing bylaws or policies, and represent you during any court proceedings, should a conflict of interest arise.