What is a conflict of interest policy and why does my charity need one?

A conflict of interest policy is a set of rules requiring board members, officers, and key staff to disclose any personal, financial, or business interests that might conflict with their duties to the charity. It helps preserve integrity, avoid bias, and maintain public and donor trust.

What core elements should a charity’s conflict of interest policy include?

At minimum, it should require: Disclosure of any actual or potential conflicts, A definition of what constitutes a conflict, A clear procedure for how the board handles disclosed conflicts, Rules prohibiting interested persons from voting on conflicted matters, and Consequences for failing to comply

Is a written conflict of interest policy legally required for nonprofit organizations?

Yes. Public charities applying for 501(c)(3) status must disclose their conflict of interest policy when filing IRS Form 1023. Also, on IRS Form 990, nonprofits must report whether they have a written conflict of interest policy, how conflicts are determined, and how they are managed.

What should the board do when a conflict of interest is disclosed?

When a conflict is disclosed, the board should: Determine whether the disclosure constitutes a material conflict; Require the interested party to recuse themselves from discussion and voting on that matter; Document the decision-making process; Enforce any penalties or sanctions outlined by the policy; And periodically review the policy itself.

How often should a charity review or update its conflict of interest policy?

A charity should review and, if needed, revise its conflict of interest policy at least annually. Regular updates ensure it remains current with legal standards and organizational changes.

Adopting a Conflict of Interest Policy for Your Charity

Bylaws and other governing documents create a framework that is fundamental to a charitable organization’s successful operations. A conflict of interest policy provides set guidelines for handling situations in which board members, officers, or other significant members of the organization may have personal or financial interests that potentially conflict with their ability to act in the organization’s best interests. A strong conflict of interest policy will help safeguard your charitable organization’s integrity and ethical standards.

The California Center for Nonprofit Law is here to educate and guide you regarding all measures and best practices that your charitable organization should follow to avoid legal problems in the future. We will give you the advice you need and help you draft and implement any necessary documentation for your charitable organization. Contact us today at (949) 892-1221 to see how we can help.

The Purpose of a Conflict of Interest Policy

A conflict of interest policy guarantees that the organization’s leaders, including board members, officers, and key staff members in leadership roles, maintain their fiduciary duty to the organization. In other words, these leaders must put the organization’s interests above their personal, business, and financial interests. A large part of one’s fiduciary duty involves avoiding potential conflicts of interest – or any appearance of conflicts of interest – that could undermine the fiduciary duty and compromise organizational interests.

A conflict of interest occurs when an individual has the power to influence an organization’s activities and stands to gain something from those activities. The most common type of conflict of interest arises when a person in a position of authority, such as a board member or officer, could benefit financially from a decision they make in their role as a board member for a nonprofit organization. For instance, this conflict of interest might occur when leasing or buying property or services from a board member.

Understanding the Content of a Conflict of Interest Policy

A conflict of interest policy should contain at least two provisions:

A requirement that those who believe that they have or may have a conflict disclose that conflict or potential conflict; and
A prohibition on interested board members voting on any matter in which there is a conflict.

Beyond those provisions, each charity must determine:

How, when, and to whom individuals should disclose conflicts or potential conflicts;
The definition of a conflict of interest and how the board determines whether a conflict exists;
The procedure for handling conflicts;
The consequences for violating the conflict of interest policy; and
An annual date to review and revise the conflict of interest policy as needed.

Conflict of Interest Policies and Nonprofit Organizations

Federal law requires that all nonprofit organizations have written conflict of interest policies. Public charities applying for §501(c)(3) tax-exempt status must disclose information concerning their conflict of interest policies when they submit IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

Likewise, when filing IRS Form 990, Return of Organization Exempt from Income Tax, organizations must indicate whether they have a written policy on conflicts of interest, how the board decides whether a conflict exists, and the process the board uses to manage conflicts. In addition to the organization potentially losing tax-exempt status for failing to properly handle and manage conflicts pursuant to a written conflict of interest policy, the person who benefits from the conflict of interest could also face sanctions.

Allow Us to Meet Your Legal Needs

The California Center for Nonprofit Law dedicates its efforts to the daily legal matters that charities face, including ongoing compliance with local, state, and federal law. Call us today at (949) 892-1221 and schedule a time to discuss your case. Get your questions answered and learn more about how we can help.

Contact the California Center for Nonprofit Law Today

Every business needs a good lawyer, and nonprofit organizations are no different. We have the expertise and experience to help your nonprofit organization grow and comply with all applicable laws and regulations. Call the California Center for Nonprofit Law today at 949-892-1221, email info@NPOlawers.com, or fill out our contact form to learn more about our services.

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