The Nonprofit FAQ

Can a nonprofit make loans to officers or directors?

Susan A. Davis, attorney at law in Scottsdale, AZ (susan.a.davis@azbar.org) wrote to CharityLaw (a service of CharityChannel) on June 20, 2001: I am looking for resources for revising the bylaws of a nonprofit in the areas of board conflict of interest and loans of corporate funds to directors as well as outside parties. The charity wants to be able to make loans with appropriate safeguards. Can anyone point me in some directions? She received several useful replies: From Stephen Nill, CEO, The Charity Channel: I'd be very hesitant to permit the funds of a nonprofit organization to be loaned to a disqualified person, i.e. another board member. The funds are supposed to be dedicated to the exempt public purpose, and not as a private bank for board members. Also, the issue arises as to whether or not the board meets its fiduciary responsibilities under applicable state law if it loans money to private parties -- such a question needs to be answered before going forward. (I'm not saying that this will necessarily be a bar -- I'm just saying thats it's something to pay attention to.) If you do go forward with this, you'll of course need to deal with the Intermediate Sanctions rules and draft the board policy to mirror the rules -- especially the safe harbor requirements designed to shift the presumption in favor of the board and disqualified person. (Further discussion on the subject of Intermediate Sanctions is available in the Nonprofit FAQ at http://www.idealist.org/if/i/en/faq/84-86/9-3. --Ed.) For what it's worth, I routinely prohibit in the board policies I draft private loans to board members (and other disqualified persons) and to outside individuals. Sorry, I don't have any sample language at hand going the other way. I would approach it, though, as with any transaction with a disqualified person where there is a concern that the transaction might trigger excise taxes on board members or on the disqualified person engaged in the transaction itself. From Lisa A. Runquist of Runquist & Zybach LLP in Los Angeles: If you have not already done so, I would recommend that you 1) check out the area of intermediate sanctions (you can start with the article I have on my web page -- http://www.runquist.com/article_intermedsancts.htm -- if you like) and 2) that you take a look at the conflict of interest policy that the IRS has prepared (also on my web page as an attachment to the article on how to keep your exempt organization out of trouble with the IRS -- http://www.runquist.com/article_IRSTrouble.htm). From Barnaby Zall of the Law Offices of Barnaby Zall in Rockville, MD: Not to mention that many state laws prohibit NPOs from making loans to officers and directors. E.g. DC Code 29-505(6), NY NPCL 716. Steve Nill always adds this CharityLaw Caveat: "Though discussions on specific legal problems are permissible and expected in this forum, remember that no posting here shall constitute legal advice, and you should never rely on any contribution to this, or any, Internet discussion forum on important legal questions. Indeed, no Internet discussion forum is a substitute for the careful legal advice of a competent attorney at law." Posted 6/22/01; revised 8/16/08 -- PB