Understanding Conflicts of Interest

Written by Chaston Asbury on Nov 12, 2020 in Church Management

Running a church or ministry is no simple task! As a nonprofit leader, you’re accountable for handling multiple responsibilities in a compliant way. Of the many decisions you and your board of directors will make, it’s important to consider situations within your organization that may cause conflicts of interest.

Continue reading to better understand what a conflict of interest is, as it pertains to nonprofit organizations, and how to prevent one from happening!

Who would present a conflict of interest?  

“Conflict of interest” is a common term that you have probably heard. However, are you familiar with how it relates to your 501(c)3 nonprofit organization? One of the most important things about understanding conflicts of interest is knowing who may present a conflict of interest within your organization.

The Internal Revenue Service (IRS) refers to individuals with a vested interest in a tax-exempt organization as disqualified persons (see Treasury Regulation 53.4958-3). Disqualified persons can include:

  • Officers
  • Directors
  • Bishops
  • Trustees
  • Board members
  • Senior Pastors
  • Relatives of officers, directors, bishops, trustees, board members, or the pastor
  • Individuals on the board of directors receiving compensation from the organization

Now that we have a better understanding of who may present a conflict of interest, let’s look at what some conflict of interest situations may be.

Conflicts of Interest and Compensation 

Examples of conflict of interest situations regarding a minister’s compensation include:

  • When a family member votes on the compensation of another family member (for example: if a pastor’s spouse were to vote on the pastor’s compensation).
  • When a compensated individual votes on the compensation of another compensated individual.
  • When a pastor votes on his/her own salary.

As mentioned above, salaries for pastors and ministers can often cause scenarios in which conflicts of interest arise. That’s why it’s important to create a minister’s compensation package that benefits the minister while meeting legal compliance. At StartCHURCH, we will help you set up a generous and compliant Minister’s Compensation Package. To get started, give us a call today at 877-494-4655 or click the link below!

Learn More About Minister’s Compensation

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Conflicts of Interest and Services 

Some more examples of common conflicts of interest include:
Leasing/renting/purchasing property from a board member.

-Hiring a board member, their family, or a highly-paid staff member to do contract labor such as graphic designing, construction, financial services, and more.
Does this mean that you cannot utilize a board member’s services if he/she owns a business that could help the church? Not at all!

As a public charity, your organization must be organized and operated exclusively for charitable purposes. Furthermore, section 501(c)(3) states that no part of a public charity’s net earnings can inure to the private benefit of shareholders or board members.

This means that when financial transactions do occur between a disqualified person and the nonprofit organization, great care must be taken to show that the interest of the organization is put above the interests of the disqualified person (hence the conflict of interest).

Arm’s Length Agreements

The Internal Revenue Manual (IRM) states: “There is nothing in [Internal Revenue Code] IRC §501(c)(3) to prohibit dealings between a charitable organization and its insiders (those in controlling positions) as long as those dealings are at arm’s length, in good faith, and reasonable.”

What does this mean? As long as you can prove you are acting in the best interest of the nonprofit by establishing an arm’s length agreement, you will not have to worry about a conflict of interest situation occurring.

If your organization is looking to rent a public space, and someone on the board of directors has a public space to rent, an arm’s length agreement would include a description of:

-Comparable rental properties in your area

-Prices of each rental property, and

-The benefit that the nonprofit would receive be renting space from the board member

Generally speaking, the significant benefit of renting from a board member is that the organization could pay less than fair market value for the use of that space.

How the IRS deals with conflicts of interest

The IRS does not take conflict of interest situations lightly. In fact, they can levy hefty fines and penalties upon all parties involved if your organization is engaged in a conflict of interest.

Unless properly documented board meeting minutes are in place, there is no legal, or even written proof, that the nonprofit correctly approved the financial arrangement. According to Treasury Regulation 53.4958-4(c)(1) and section 4958(a), even the smallest gap in documentation (i.e., board meeting minutes) could perhaps result in hefty excise taxes of up to 225%. The severity of these penalties needs to be respected, and both churches and ministers should carefully consider how to determine and document all financial transactions.

Preventing a conflict of interest

Understanding how to properly handle compensation and financial arrangements with disqualified individuals is key to preventing a conflict of interest situation from arising.

Below are some key steps to keep in mind when creating financial arrangements that will help you approve them in an IRS compliant and beneficial way for all parties involved.

1. Make sure that financial agreements are reasonable.

  • Proving reasonability is done by utilizing comparability data. Comparability data includes researching the pay of other staff with a similar position, credentials, organization income, organization size, geographic location, and more.
  • Reasonability would be determined by researching the fair market value of similar properties in the area when renting space from an individual on the board of directors. The organization can then enter into a rental agreement either at or below the rental space’s fair market value.

2. Create an arm’s length agreement.

  • An arm’s length agreement means that the parties involved in formalizing the agreement are not under any strain by an outside party to sway the decision in that party’s favor.
  • Sharing in the preliminary talks regarding the agreement, sharing what they will offer in the transaction, and sharing the benefit the board member is looking for is permissible. However, recusing themselves from the final vote regarding the compensation upholds the requirement that an arm’s length agreement be established.

3. Keep board meeting minutes.

  • The board meeting minutes should include the comparability data and note that the board member recused himself/herself from the vote.
  • Make sure to include the board meeting minutes in your corporate records and that the arrangements you establish do not violate the terms of the agreement.
    We designed a beneficial resource to help your church or ministry keep board meeting minutes. With the Minutes Suite, we’ll guide you through creating a balanced board, how to correctly run a board meeting, taking minutes, and what meetings you need to have every year. To learn more, give us a call at 877-494-4655 or click here!

4. Reassess financial agreements annually.

  • All salaries, and any other continuing financial arrangements, must be revisited and re-approved each year, typically at the beginning of the fiscal year.
  • Also, when a service agreement is in place, the agreement may need to be revisited to account for changes in the fair market value of the service or changes in terms.

Let us help you!

If you have made any decisions that were a conflict of interest in your church in the past, there is still a way for that to be reconciled! Give StartCHURCH a call, and our professional consultants can help your ministry get right and stay right. Speak to us now at 877-494-4655 or click the link below to schedule a call.


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